If you’re a bit strapped for cash going into your retirement, or even a few years in, you might be considering getting a reverse mortgage. However, you might want to do some research about the type of loan that you’re signing up for. After all, reverse mortgages entail high fees, and they result in the lender owning your home when you pass away.
Today we’ll take a critical look at reverse mortgages to see if they’re really right for you. There are situations when a reverse mortgage could be a good deal for you financially, but it could just as easily be a bad trade-off. Let’s look a little deeper.
What is a Reverse Mortgage?
A reverse mortgage is a loan issued by a bank with the trade-off being the equity in your home. Unlike a normal mortgage, a reverse mortgage goes up in incremental payments made to you as the interest increases. However, they carry heavy fees. In fact, these fees can be up to three times higher than a traditional mortgage. Not to mention, the up-front fees can be ten percent or more of the actual loan.
Yes, a reverse mortgage will put money in your pocket at the outset, but it can be a hassle for a number of reasons. When you’re borrowing against your home equity, you’ve essentially sold your home to the bank. If you want to move, you have to pay back the reverse mortgage, and since it’s eaten up so much of your home’s equity, this means you’ll have to cover the costs of any move yourself, and still come up with a down payment on a new place.
Other Drawbacks
A major reason not to get a reverse mortgage is if you plan to leave your home to your children. In many cases, people leave their assets, including their homes, to their kids when they pass away. If you’ve taken out a reverse mortgage, however, you can’t do so. The lender will take possession of your home and sell it to recoup the loan they gave you for the reverse mortgage.
This means that reverse mortgages can be a terrible idea for people who intend to leave their homes to their families. If you live in a family home that you want to pass to your kids, stay far away from anyone wanting to give you a reverse mortgage.
Advantages
This all being said, there are a few reasons you might want a reverse mortgage. If you’re very strapped for cash in your retirement and you have no children, or you don’t have any plans to leave your home to your children, then you might consider a reverse mortgage. If you don’t plan to move again, this can be an attractive way to shore up your finances to help cover some of your recurring bills.
The line of credit you get with a reverse mortgage isn’t subject to being frozen by a market downturn. If you have bad credit, or a high debt-to-income ratio, a reverse mortgage can be a good way to get some immediate financial relief to help cover your bills. However, if you can qualify for a home equity line of credit, and you live in a pricey area, you might be better served by downsizing and moving to a less expensive region.
Bottom Line
While most people would benefit more from home equity credit lines or home equity loans, there are some who find reverse mortgages to be more appealing to their financial situation. However, unless you are very strapped for cash and have poor credit or a high debt-to-income ratio, you should likely stay away from a reverse mortgage.