TV ads targeting retirees often pitch the benefits of reverse mortgages, a concept that can seem easy and appealing. With a reverse mortgage, as long as you own and occupy your home, you can pay for your expenses with a loan that you won’t need to pay off. You can bring in a form of income by drawing from your home’s equity. This sounds simple, but you need to be informed. Nothing is ever quite as simple as it seems, and you’ll need to understand the process before you sign anything.
Reverse Mortgages: How They Work
How reverse mortgages work: Reverse mortgages are usually federally insured and they require the following: (1) at least one borrower must be 62 or older; (2) the home must be the primary residence; (3) the borrower must be financially able to keep up with the home (taxes, insurance, maintenance); and (4) the borrower must own the home outright or have a very low mortgage.
Consider your estate plan: Do you plan to leave your home to your beneficiaries? If so, your reverse mortgage will reduce the value of the home over time. If you live long enough to exhaust the value of the equity in the house, your heirs may need to pay off the debt or refinance the mortgage in order to keep the home.
Retirement income: If you take on a reverse mortgage, you’ll have additional retirement income, which you can receive as: (1) an upfront lump-sum, (2) a monthly payout, or (3) a line of credit. All three options vary, and each has implications for your taxes, borrowing costs, and the value of the home itself. Talk to your financial advisor and estate planning attorney before you enter this arrangement so you know you’re choosing the best option for your plans and circumstances.
Buyer beware: It is important to make sure you avoid scams that are pretending to be legitimate reverse mortgages. One way to help avoid being tricked is to make sure you work with a reputable provider. You should also make sure that a reverse mortgage is a good fit for your financial needs before signing any documents. Finally, consider the estate planning impact entering into a reverse mortgage may have on your intended wishes once you are gone.
The Implications of Reverse Mortgages
Your reverse mortgage can have an impact on your estate plan, your retirement income, and your living circumstances. Before you make a commitment, you’ll need to watch out for scams, and you’ll need to address questions like these:
- Can your current life insurance pay off your reverse mortgage?
- Will your reverse mortgage exceed your home’s value by the time your life ends?
- If you die before paying off the loan, what will happen to others living in the home?
Get Some Answers
Shop around to find a reverse mortgage lender who can offer appropriate terms, and as you do so, talk to our team. We can help you learn everything you need to know about the options available, and how your reverse mortgage will affect your income, your family and your estate plan.