For senior citizens, one of the biggest worries and challenges of living out their retirement can be finding a source of income to maintain a comfortable lifestyle. Pensions and social security benefits aren’t always sufficient to cover expenses, and downgrading your lifestyle to scrimp and save probably isn’t how you pictured spending your golden years. One investment product you’ve probably heard a lot about as a potential solution for this situation is the reverse mortgage. In a reverse mortgage, you take out a loan using the equity in your home as collateral. You retain ownership of your home and don’t have to make payments on the loan, and when you move out, pass away, or sell your home, the loan is typically paid back through proceeds from the sale of the property. Reverse mortgages are insured by the government, so if the selling price isn’t enough to cover the loan balance, your heirs aren’t liable to cover the difference. For seniors looking for regular cash flow to meet their immediate needs, a reverse mortgage can be a great option to convert the equity in their home into money they can use to enjoy a good quality of life. Is a reverse mortgage the right option for you? Here are five things to ask yourself before you apply for one.
Do you qualify?
To get a reverse mortgage, you have to be at least 62 years old, own your home outright (or be able to pay off the remaining mortgage balance with money from the reverse mortgage), and live in the home you’re taking the reverse mortgage out on. Most types of homes, including condominiums and manufactured houses, are eligible for a reverse mortgage.
Do you need the money right now?
Reverse mortgages are intended to help you get money you need for immediate concerns, like health issues, monthly bills, major unplanned expenses, or to enjoy a better quality of life. If you already have the means to adequately support your day to day lifestyle, you might want to consider different financial products, like short-term investments, to supplement your income. You’ll also want to decide on the best way to receive the money from a reverse mortgage if you do decide to get one, as you can get it in several different ways, including monthly payments, as a lump sum, or as a line of credit you can draw from.
Is there a better option, like selling your home or taking out a loan?
There may be other ways to use the equity in your home to get money you can spend now. If you’re willing to move and your home has appreciated in value since you purchased it, you might want to look into selling it. You could move into a more affordable place and pocket any extra money you made off the sale. If you have a large home, you could look into the possibility of renting out extra rooms for a regular monthly income. You might also consider taking out a standard home equity loan, if you need a large amount of money for a major one-time expense and have good credit and the means to pay the loan back.
Do you want to pass on your home free and clear to your children?
If it’s important to you to be able to pass along your family home to your children or grandchildren with a clean title, a reverse mortgage may pose some difficulties, but it’s still possible. Normally, a reverse mortgage is paid off by the eventual sale of your home, but your estate can take up to twelve months to find other ways to pay off or refinance the loan if they want to retain ownership of the property. It might also be the case that you don’t have any descendants who need or expect to inherit your home, in which case this is nothing you have to worry about at all.
Have you found a reputable lender and gotten financial counseling?
There are different types of reverse mortgages and a wide variety of lenders who provide them, and it’s important to find a reputable lender that charges reasonable fees and will help guide you to a product that makes sense for you and will provide benefits for your life—not just the one that makes them the biggest commission. It’s also required, as part of the reverse mortgage application process, to meet with a financial counselor approved by the Federal Housing Administration.
For aging homeowners, a reverse mortgage can provide the solutions to many kinds of financial difficulties, but getting one is a major decision that requires lots of planning, forethought, and homework. Make sure you take the time to think about all aspects of your situation before you apply and you’ll be able to feel confident that if you do opt to go through with a reverse mortgage, you’re making a wise and well-considered decision.