It wasn’t all that long ago that many people considered the TV ads pitching reverse mortgages to be just a scam against senior citizens and that actually getting a reverse mortgage was a very foolish move. But many protections have been put in place in recent years and, as a result, a better understanding has evolved on the ways in which a reverse mortgage might genuinely make sense as a way to supplement retirement income. The keyword here is “might.”
Simply put, a reverse mortgage (also known as a Home Equity Conversion Mortgage, or HECM) is a way to use the equity in your home to increase the amount of money you have available to live on. Since so many in our baby-boom generation are at the right age to retire but are woefully unprepared to stop working and thus end that steady stream of income, it’s worth looking at ways to fill the gap.
If you have a regular mortgage now, a reverse mortgage will eliminate that payment and could also give you additional monthly income either right away or at some point in the future. If you have no mortgage now, that monthly income could be significant, depending on how much your home is worth.
You will have no payments to make on the reverse mortgage, you will continue to own your house, and the reverse mortgage does not have to be paid back until you sell your house, move out, or die (at which time the reverse mortgage is either paid with the proceeds from selling the house or the house is given to the lender).
A reverse mortgage can be good for you if you meet all of these conditions:
Despite this having become a potentially attractive and legitimate part of retirement planning, there are some definite downsides. For one, it can be expensive. In fact, it’s probably the most expensive way to get at your home’s equity because of the high closing and insurance costs.
The process of acquiring a reverse mortgage can be complicated and requires an upfront consultation with a government-approved counselor to make sure the prospective borrower is clear on what this all means and the implications for the future.
Finally, there are several options for structuring the reverse mortgage, each of which has different interest rates and different withdrawal strategies and it may not be simple to know which one is best in your particular situation.
Why not just get a regular line of credit?
An alternative, both less complicated and less expensive, is to establish a line of credit on the equity in your home and draw on that line when you need to. This could be a better way to go if:
Obviously, there are no easy answers here. If you are interested in a reverse mortgage, or even in finding out more information, start here with the government’s overview: “Top Ten Things to Know if You're Interested in a Reverse Mortgage” https://www.hud.gov/program_offices/housing/sfh/hecm/rmtopten.
Getting a reverse mortgage could be a very good option for making your retirement more comfortable, but you should learn as much as you can, get all the advice you need, examine all of your options, and proceed cautiously.
I'm Linda Fleit. My husband and I were lucky enough to retire when we were 61, about nine years ago. We love being retired and want to share all that we've learned over the years about this wonderful stage of life.