You never know what’s going to happen in or around retirement. Despite your best intentions and seemingly well-thought out plan, you can very easily run short on cash to comfortably fund your lifestyle or even basic expenses. Not all retirement plans end up delivering the amount of cash needed to fund retirement. Some retirees find themselves running out of money before they die.
Given these potential pitfalls, it’s a good idea to anticipate what might go wrong in or on the road to retirement and consider ways to put together a plan to mitigate potential damage. If you’re 62 years of age or older, it could make sense for that plan to include a reverse mortgage. Before committing to a reverse mortgage, you must thoughtfully consider the risks and be certain you’re making this choice as part of a larger and comprehensively sound plan.
On this page, we detail the things you need to know about reverse mortgages. From this page, you can obtain more information and compare offers reverse mortgage companies. We encourage you to explore various options from this page so you can put together a clear picture of the reverse mortgage landscape and make a confident, well-informed choice.
A reverse mortgage is a type of home equity loan, however it functions differently than traditional products. While you receive funds against the equity in your home, you do not have to pay the loan back until you move or default in some way on the mortgage. When you die, your estate must cover the loan, quite possibly by selling your home.
So the main difference between a reverse mortgage and the more popular home equity loan is that you do not make monthly payments with a reverse mortgage. The opposite holds true -- your lender makes payments to you. You can use this cash flow however you like.
The one thing reverse mortgages do have in common with traditional home equity loans are fees. According to the National Council On Aging, expect to pay origination fees (cannot exceed $6,000), servicing charges and third-party closing costs, including a home appraisal, credit check, inspections and title search.
You’ll also pay an FHA insurance premium upfront and annually, however this guarantees you receive your loan payments. It also provides price protection so that when your loan comes due, your estate will not have to pay back more than your home is worth. For example, the Consumer Financial Protection Bureau (CFPB) advises that FHA insurance guarantees that your heirs will not have to pay more than 95 percent of the appraised value of your dwelling if they decide to sell upon the death of the last homeowner. Beware that FHA insurance is separate from your homeowner’s insurance policy.
One reason why you might go for a reverse mortgage in retirement is that you could have difficulty qualifying for a standard home equity loan. That’s because on a traditional loan, you receive the proceeds up front and have to pay your lender back monthly. Most lenders expect ample monthly income to meet this obligation. If you’re in retirement and considering options such as a reverse mortgage, chances are you do not have sufficient income to secure a traditional loan.
In this case, a reverse mortgage could be exactly what you’re looking for.
That said, not everybody qualifies for a reverse mortgage. Here’s a list of things you need to check off to see if you qualify:
✓ The youngest homeowner must be at least 62 years of age.
☓ If you’re 64 and your spouse is 59, you do not qualify for a reverse mortgage.
✓ Your home must be your primary residence.
☓ You must live in it for the majority of the year.
✓ Your home must be paid off or you must have a low mortgage balance.
☓ According to the CFPB, when you close on a reverse mortgage, you must pay any balance due on your home loan. You can use reverse mortgage funds to do this. You also have the option of using any cash you might have on hand.
✓ You must set aside money to pay for the upkeep of your home and other expenses related to ownership.
☓ You cannot let your home fall into disrepair while in a reverse mortgage.
✓ You must clear any delinquent federal debt (e.g., taxes, student loans).
☓ Here again, you can use reverse mortgage proceeds to take care of this.
Like many financial decisions you make around retirement, you must take the notion of a reverse mortgage seriously. For some seniors, the cash flow a reverse mortgage generates provides relief from the crunch of daily living expenses. For others, it affords the opportunity to better enjoy retirement. No matter your situation, do the research and crunch the numbers to ensure that you’re actually taking care of any money problems you might have rather than making them worse.
This is why we put together this resource. To give you access -- with just a click or two -- to additional information and the ability to compare options from multiple reverse mortgage companies.