This article is only an introduction to a financial product and not a recommendation. You must determine whether it suits your or your parents’ financial needs.
A reverse mortgage is a home equity loan that can provide an extra source of income for seniors. Equity in a home represents the largest form of wealth for many seniors. Yet home equity wealth typically remains an untapped asset for most people in retirement.
You may question why anyone would consider a loan when your finances are already tight. The reason is this loan does not require pay-off until the house is eventually sold and the loan is paid back from the proceeds. There are some regular payments for insurance, fees and taxes.
Eligibility for a reverse mortgage starts at age 62. You qualify for greater amounts of equity as you age. There are several options for how you pay yourself from your equity. Be aware that interest is charged on the amount of equity you use and the interest builds as long as the loan amount remains outstanding. Considering the loan amount may be outstanding until the home is sold, interest could be compounding for a long time.
These loans, like any financial product, have their good and bad points. You have to determine what amounts to good or bad in your situation. The highlights…
Good points. You can use a major source of assets in retirement. You can create income stream or pay for major expenses that pop up in lump sums. You control how you receive loan payments and the amounts. The Home Equity Conversion Mortgage (reverse mortgage) is highly regulated and overseen by the federal government specifically to reduce senior abuse—choose a government approved lender. By design, the pay-off cannot amount to more than the value of the home. Qualification is not based on income or credit status (although the borrower must have income enough to maintain the house and pay the required insurance and taxes).
Bad points. Up-front loan costs. Sketchy loan companies. You must sell the home at some point, or pay-off the loan from other sources, so family, friends or charities inheriting the home have to deal with the reverse mortgage pay-off requirement. Someone living in the home, who is not a co-borrower, will have to move out when the borrower dies or stops living in the home (e.g. moves to assisted living). Make sure a spouse is a co-borrower. You could outlive your equity—depleting the income source. Medicaid eligibility could be an issue.
Learn more at the Consumer Financial Protection Bureau (CFPB) site, www.consumerfinance.gov, search “reverse mortgage” or talk to your lender.