For those approaching retirement, the concept of making ends meet on a fixed income is often the most terrifying and daunting aspect of the decision whether to leap into retirement, or try to hang on for a few more years in the workforce in order to have more money saved up and available to live on. One option that many facing retirement look into as a way to supplement their income is a reverse mortgage.
Reverse mortgages were popular with elderly citizens during the initial effects of the financial crisis. While we as a nation were just beginning to realize our economy was far from stable, people 62-years-old and up who were feeling the strain on their finances but owned their homes outright began setting up reverse mortgages that gave them income to live on. This saved some of the equity of their homes that quickly slipped away when the housing market crisis occurred.
Basically, how a reverse mortgage works is a bank makes you a loan by recording a mortgage against it. During the time you are living in your home, you can choose to receive a lump sum of cash, a credit line, regularly monthly cash advances, or any combination of these options. No repayments of this loan are made during the life of the loan, which is why they are so attractive to people who have a lot of money tied up in their homes but not enough money in their bank accounts. Instead, this loan is paid back to the bank, along with fees that include closing costs, insurance costs, and other fees tacked on by the bank, after your time of death, when your home is no longer your primary residence, when an heir takes over the property, or when your home is sold.
On its face, a reverse mortgage seems like a great resource available to people who are ready for retirement but need to ensure that they will have the income they need to live comfortably. However, when you delve deeper into the pros and cons of reverse mortgages, you’ll find that many people are against this option because of the amount of fees and other costs that come along with the initial loan you receive, and the amount of time this loan accrues those fees.
If your plan is to set up a reverse mortgage and live on this income until your dying day, when afterwards, your house will be sold to pay the bank back, you may not have much else to worry about. However, if you choose a reverse mortgage at 62-years-old, the minimum age requirement for this option, this loan will likely have fees and charges added onto it for the next 20 years or longer. After you move out of your home or after you are deceased, if your child, grandchild, or another heir chooses to take over this property, they will likely owe the bank more than your home was worth when you chose to set up the reverse mortgage. That is one expensive loan that must be paid back to the bank one way or another.
As with any financial decision that will have a tremendous impact on the rest of your life and the lives of those closest to you, speaking with a variety of banks and experts is always the best thing you can do. Get the facts on reverse mortgages and weigh your options for retirement opportunities that can help supplement your income.
Photo by IronRodArt – Royce Bair