There are many challenges that people face when they retire. One of these challenges can come about if unexpected expenses or underestimating your expenses causes your retirement savings to not cover your basic expenses. One of the ways that many older homeowners seek to cover these expenses is with a reverse mortgage.
In short, a reverse mortgage allows you to continue living in your home while trading interest, fees, and home equity for either a line of credit or cash. The most common type of reverse mortgage, which trades in home equity, is both federally insured and available to people 62 and older who meet the federal requirements. There are many pros and cons to a reverse mortgage, and you should carefully consider whether this option is what you’re looking for or if you should consider another option. Here are some of the pros and cons of reverse mortgages.
Pro: Supplemental Income
There are plenty of people who, upon retiring, find themselves with a paid off house but less savings and income than they would like. While most people have already calculated how much they will need in retirement for the usual homeowner’s expenses, such as insurance and property taxes, they may have underestimated how much they need for other expenses. In addition, if job loss or health issues mean retirement comes earlier than planned, a line or credit or monthly payments from a reverse mortgage can help make up that difference.
Pro: Helps Pay Off Existing Mortgage
Still having payments to go on your regular mortgage can delay retirement beyond what you might hope for. A fairly common use for reverse mortgages is to use it to cover the monthly payments on your existing mortgage. This seemingly circular proposition will cover an often burdensome monthly payment and free up your retirement savings for other expenses.
Pro: It’s Tax-Free
Because the IRS considers a reverse mortgage to not be income but a loan, you won’t have to worry about taxes on the income from a reverse mortgage. If you’re living on a fixed income or retirement savings, then that could come as a big relief. While there are still costs to consider, such as premiums and interest charges, these may be negligible in comparison to the reduced tax burden.
Con: Potential to Default
Of course, defaulting on a reverse mortgage comes with the risk of losing your home. The most common cause of defaulting comes from ceasing to meet the loan requirements, which can actually happen completely by accident. Failing to certify your home as your primary residence, failing to pay property taxes or insurance on your home, or not making required home repairs are all common ways to default on your reverse mortgage. If you don’t believe you’ll be able to meet these requirements, then you may want to try another strategy, such as selling your home.
Con: It’s Definitely a Long-Term Option
While a reverse mortgage can be a huge financial help long-term, the initial costs can be quite expensive. The initial insurance premium is generally 2% of your home’s value, which depending on your home can be quite expensive. Of course, you can use some of the reverse mortgage money to cover that expense, but if you just need a one-time or short-term financial option, there are other loan options that are less expensive up-front and won’t require as much long-term commitment.
Con: Your Home May Not Stay in Your Family
If you choose to get a reverse mortgage, your heirs will need to pay off either the loan balance or 95% of your home’s value, whichever is less expensive. If they aren’t able to buy back the home, it won’t be able to remain in the family. In these modern times, this is less of a concern than in previous generations, but if your home has been in your family a long time or has great sentimental value to your heirs than you may want to consider other options.