By Kim Olson
We’ve all seen the advertisements on reverse mortgages: “Get money now, pay all of your bills, stay in your home as long as you want to, and never make another mortgage payment!” That sounds good, doesn’t it? However, although these can be good for older homeowners, they may have drawbacks that will do more harm than good in some circumstances.
If you or a loved one is considering a reverse mortgage, know what you’re getting into before you sign on the dotted line.
What’s a reverse mortgage?
With a reverse mortgage, you will need to own a home and will have to have that home paid off, or nearly so. With a reverse mortgage, you essentially tap into your home’s equity by taking out a loan, somewhat like a cash advance. You can opt to have this loan paid to you in monthly draws, as a line of credit, or as a lump sum payment.
- A reverse mortgage is not “free money.”
You have to pay it back with interest. However, unlike a traditional mortgage, you don’t have to do the repayment during the term of the reverse mortgage. Instead, you pay it back all in one lump sum, at the end of the loan. You don’t have to qualify in terms of income or credit, as you do with a traditional mortgage, but you do have to be 62 or older.
- When do you have to pay the money back?
As long as you stay in your home and keep up insurance payments, tax payments and repairs, you generally don’t have to pay the money back. Once you die, sell the house, or move and are away from the house for 12 months or more, repayment is triggered; at that point, the money will need to be paid back.
- You keep ownership and title.
As with a traditional home equity loan, for example, you’re not signing over your home to anyone. You’re still responsible for property taxes, insurance and repairs.
Although reverse mortgages can be a godsend for seniors who plan to stay in their homes “forever,” and who need to cover expenses, they are not without risk. One important reason is that you are tapping into the equity of your home, so you may not be left with much money if you decide to sell your home at some point. That’s because if you sell your home, you’re going to have to pay your reverse mortgage off, leaving you with whatever monies are left over. Here are some questions to think about before you decide to take out a reverse mortgage:
- What are you going to do with the money?
As with any other type of borrowing, a reverse mortgage should not be taken out for frivolous expenses or to cover unsecured debt like credit cards. If you do decide to take a reverse mortgage, it should be for covering the costs of health care, for example, because you plan to stay in your home as you age.
- Are you going to stay in your home for the rest of your life?
If you plan to stay in your home for the rest of your life and pay for home care, etc., right in your home as you age instead of moving to assisted living or a nursing home, a reverse mortgage may be a perfect solution, since reverse mortgage funds will give you the money you need to pay for at-home care. However, if you ever intend to move to assisted living, you may not be able to afford it if you don’t have much money left over once you repay the mortgage.
In general, remember that a reverse mortgage should be seen as a “last resort” to cover extra expenses like home health care if you want to stay in your home as you age, not as a true source of income. Investigate carefully and only take out a reverse mortgage if you’re sure it’s the best solution for you.