Are you thinking about retiring soon, and how you’ll fund it? If your bank account is looking a bit on the short side, it’s important to know that you’re not alone. Dozens of surveys and studies say that most Americans aren’t prepared as they head into retirement. At the same time, a rising debt load can make things seem even more dire.
The news isn’t all bad, though. If you’re a homeowner, there are many ways to pay off debt and fund your retirement at the same time. HELOCs, home equity loans, a Home Equity Investment (HEI) from Point, or even reverse mortgages can help provide a solution.
You may have heard that reverse mortgages can give you that much-needed cash, require no monthly payments, and allow you to remain in your home. That’s true, and that’s also why they’re so popular.
But reverse mortgages are also one of the most complicated financial products out there for homeowners. They’re so complicated, in fact, that many of them require you to sit down with an independent counselor to make sure you fully understand what you’re getting into.
That doesn’t mean that reverse mortgages won’t work for you. They may be the best option, or they might not be — the only way to know is to make sure you know exactly what is a reverse mortgage so you can see whether it fits into your financial plan.
Pros of Reverse Mortgages
- No monthly payments
- You can keep living in your home
- No income or specific credit requirements
- Many options for how to receive your money
- You can generally use the funds for whatever you want
- Your surviving spouse may get to continue living in the home
Cons of Reverse Mortgages
- Very expensive
- Must be at least 62 years old
- You lose equity in your home
- Loan amount is limited to $726,525
- It may be possible to outlive your funds
- More complicated than a normal mortgage
- May lose your home if you can’t meet ongoing requirements
- May make it difficult or impossible for your heirs to keep your home
- In some cases, your surviving spouse or roommates may have to move out after you pass away
Who Qualifies for a Reverse Mortgage?
Reverse mortgages aren’t available to just anyone. You’ll need to meet the following criteria before you’re even eligible for them at all:
- You can’t owe any federal debts
- You must be at least age 62 or older
- The home must be your primary residence
- You must have at least 50% equity in the home
- The home can’t be a mobile home or a manufactured home
- You must have the financial means to keep up with repairs, homeowners insurance, and your property taxes
What Is a Reverse Mortgage?
Remember when you first took out your mortgage? You started out with a very large loan, and each month you chipped away at it bit by bit. You sent in monthly payments to your lender and over time, the balance got smaller. Eventually, you may have even paid it off entirely.
A reverse mortgage works much the same way, but as the name implies, it works in reverse. This time, the lender gives you money. It’s essentially the bank buying your house back from you.
A reverse mortgage can be paid out in a lump sum, kept open as a line of credit, or paid out as monthly payments over time just like when you were first paying off your loan. Your reverse mortgage balance will continue to grow over time as interest charges and fees pile up, and as monthly payments are paid out to you (if you opt for this payment method).
When you sign up for a reverse mortgage, you’re also agreeing to certain conditions:
- You must purchase homeowners insurance
- You must stay current on your property taxes
- You must live in the home as your primary residence
- You must keep up with home repairs and maintenance
If you aren’t able to meet any of those obligations, such as if you fall behind on your property taxes or aren’t able to keep your home in good order, your reverse mortgage will immediately become due. It’ll also become due if you, as the borrower, pass away.
How Do I Pay Back a Reverse Mortgage?
One of the most enticing things about a reverse mortgage is that you’ll never need to make monthly payments on it — ever. In fact, it’s possible that your reverse mortgage will outlive you, in which case the balance will be settled by your estate.
Reverse mortgages are generally paid back in one lump sum, usually from the sale of the home. It’s possible that this may come sooner than you wish, though. If you can’t meet the ongoing requirements of the reverse mortgage, you may be forced to sell your home to pay off the loan. For many people, this happens when they move to a nursing home or fall behind on property taxes or home upkeep.
So while the big advantage of a reverse mortgage is that you won’t have to make monthly payments, remember: that balance will continue getting larger over time, and as it does it’ll steadily erode any equity in your home for your heirs.
This is an important point to consider. If leaving your home to your heirs is important to you, you’ll want to think twice about taking out a reverse mortgage. In addition, if you have a spouse who isn’t listed on the reverse mortgage, you’ll need to make sure you know how they’ll be treated after you pass away. It’s possible they’ll still be allowed to live in the home, but according to the rules of some reverse mortgages, they may be kicked out so that the home can be sold to pay off the reverse mortgage.
Types of Reverse Mortgages
There are three main types of reverse mortgages. Home Equity Conversion Mortgages are the most common type, but depending on your needs another one may work better for you.
Home Equity Conversion Mortgages (HECMs)
You can borrow up to $765,525 with an HECM. While you can get them from many lenders, all of these reverse mortgages are federally insured and federally regulated. It’s still possible to end up in trouble with an HECM if you don’t understand it or plan for its use correctly, but at least there are standardized limits in place as to how HECMs work.
One important example of this is that you’ll be required to attend a counseling session with an approved independent counselor before you sign the closing documents. They’ll help to make sure you really know what you’re signing up for, what your alternatives are, and whether it’ll work in your long-term plans. You’ll have to pay for this on your own, and it should cost $125. There are no such counseling requirements for other types of reverse mortgages.
Single-Purpose Reverse Mortgages
Need money to cover a single expense, such as catching up with your overdue tax bills or doing significant repairs to your home? If so, a single-purpose reverse mortgage may be a good option for you. These are offered by nonprofits and state and local governments, and the proceeds can only be used for the exact purpose you specify up-front.
Proprietary Reverse Mortgages
Did you notice that HECMs can only be used to borrow up to $765,525? If you live in a high-cost-of-living area like San Francisco or New York, you know very well that your home may be worth far more than that. In that case, a proprietary reverse mortgage offered by a private company may be a better option for you. Be careful, though; these aren’t subject to the financial safety measures that HECMs provide, and they may come with higher interest rates as well.
Is a Reverse Mortgage Right for You?
Reverse mortgages can be as complicated to figure out as a Rubik’s Cube. If you’re considering a reverse mortgage, it may be well worth your time and money to sit down with a fee-only financial planner to go over your situation in detail and see if there are any better options for you.
An HEI from Point, for example, offers many of the same advantages as a reverse mortgage. You may be able to get enough money to help fund your golden years or to pay off debt. There’s no need to make regular, ongoing payments. Instead of using the equity you’ve built up in your home to take out a loan, an HEI from Point uses your home’s future appreciation to give you cash today, with no need for going into debt or meeting complicated requirements.
We can’t tell you whether a reverse mortgage or an HEI from Point is right for you or not. Schedule a call with a home equity specialist today to figure out the best option for your financial situation.