Top Question this Week

Top Question this Week

Our top question, Troy submitted this week.  His question is: What are your thoughts on reverse mortgages?  We have a lot of equity in our home.  Should we use the equity via a reverse mortgage for our retirement?  I have not been able to find much information and would appreciate your perspective.

Based on my research, the general consensus is, reverse mortgages have more cons than pros.  Most financial professionals do not recommend them.  Also, I would agree with that.  

Think of a reverse mortgage as a loan from a bank based on the equity in your house.  You can receive a monthly payment or a lump-sum.  Most people choose the monthly option because they are using the reverse mortgage to supplement their retirement income.  Like a home mortgage, you pay interest each month and because its a reverse mortgage, your interest payment starts out low and increases over the life of the loan.  It is the opposite (or reverse) of a home mortgage.  Based on my research, a reverse mortgage is a tool for those who have not planned well for retirement (and need income) or have encountered some significant expenses they need to pay.  Mainly, the last resort.

If you are looking to leverage your home as a retirement asset, there are a couple of other options for you to consider.  One, sell your home when you retire, buy another house for less money, and use the gains as part of your retirement nest egg.  Another option is to use the equity in your home for a line of credit.  This is a little more temporary but can help if you encounter some unexpected expenses and do not want to withdraw from your retirement savings.

That being said, like most things, it depends on the individual’s situation and what they are trying to accomplish.  Below are some pros and cons of reverse mortgages.

Pros:

  1. Generates an income stream or lump sum to supplement cashflow in retirement
  2. A tool for those not financially prepared for retirement and/or in need of some additional income
  3. Payments are not considered income; therefore, they are tax free
  4. Allows you to stay in your home - versus having to sell you home to generate cash/income

Cons:

  1. There are certain qualifications you have to meet and need to be 62 or over to apply
  2. May not generate as much income as you expect. Several factors determine how much you can borrow such as: home value, equity, your longevity, current interest rates, etc.
  3. Similar to a loan, there are closing costs, etc. with a reverse mortgage
  4. Once you leave your home (sell it, die, etc.), the reverse mortgage (loan) needs to be paid off.  Generally, by selling the home.
  5. Most reverse mortgages have variable interest rates which mean they can change over time which will impact your payments

Most experts conclude that reverse mortgages have limited use as a retirement income tool given their complexity, variable costs, and restrictions on the amount of equity you can borrow from your home.  

If you are considering a reverse mortgage, do your research, and discuss with a financial professional to ensure its the right solution for you.

Here are a few articles that I found helpful during my research:

https://www.fool.com/retirement/general/2016/04/08/reverse-mortgage-pros-and-cons.aspx

https://www.consumer.ftc.gov/articles/0192-reverse-mortgages

https://clark.com/homes-real-estate/reverse-mortgages-offer-last-option-seniors-stay-t/

https://www.cnbc.com/2015/04/01/rethinking-reverse-mortgages-bad-move-or-bright-idea.html

Thanks, Troy, and keep the questions coming.  

Have a retirement question, please ask (here), and I will respond as soon as I can.

Let’s #RetireHappy!

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