Top Reasons People are Taking Out Reverse Mortgages
Reverse mortgages seem to finally be shaking off the stigma that, unfortunately and often unfairly, was created by poor and unscrupulous lending practices. Now more than ever, reverse mortgages are back in the news and much of the attention surrounding them is positive, thanks to more responsible laws protecting consumers, as well as a general increase in consumer education. Now more and more senior homeowners are considering a reverse mortgage. But what are the top reasons people are taking out a reverse mortgage? And are these “good” reasons to do so?
First, let’s review the basics of what a reverse mortgage is and how it works.
A reverse mortgage is a special type of home loan that, instead of requiring the homeowner to make payments to the lender, the loan is ‘reversed’ and the lender actually pays the borrower. The borrower can receive the money in a lump sum, a series of regular payments, or as a line of credit. Sometimes, reverse mortgage borrowers can do a combination of these options. The money can be spent on anything the homeowner wants, and the money doesn’t have to be repaid until the last surviving borrower on the reverse mortgage no longer uses the home as their primary residence. In order to be eligible for a reverse mortgage, the borrower must be 62 or older and have a substantial amount of equity in the home.
So why are seniors taking out reverse mortgages?
Here’s a look at some of the most common reasons a senior homeowner would want to take out a reverse mortgage:
- To pay off debt. – A reverse mortgage can provide you with additional monthly income, which is drawn from your home’s equity. That money can be used to pay off other debts that are becoming burdensome and making it difficult for you to afford your day to day living expenses.
- To pay for medical costs. – As we age, we may find our medical expenses get a little less affordable. More frequent doctor visits, hospital stays or costly medical procedures can put a big strain on your finances. A reverse mortgage can help alleviate some of those expenses, without you having to sell your home or take on a second job.
- To pay for caregiver services or nursing home costs for self or spouse. – Nursing home care or in-home caregivers can also become expensive if your insurance or Medicare doesn’t cover the entire costs. A reverse mortgage could help provide a financial cushion while you make arrangements for your own elderly care or the care of your spouse.
- To make home improvements – If your home needs updating or remodeling, or perhaps you’d like to make it more suitable for aging-in-place, a reverse mortgage can help you pay for those improvements.
- To see the world. – Believe it or not, you don’t have to use reverse mortgage proceeds for boring things like bills and debt consolidation. As many seniors are embracing active lifestyles and building ambitious bucket lists, more and more reverse mortgage borrowers are using those funds to enjoy doing all the things they wanted to do but never had the time or money to do. Of course, we absolutely do not encourage frivolous spending – especially when it comes to reverse mortgage proceeds – but if all your other financial obligations are taken care of, and you’re in a position where it won’t negatively affect you or your loved ones, using the money to travel and have amazing life experiences isn’t a bad idea. Or, if you want to travel on a smaller scale, a reverse mortgage could provide you with enough money to simply visit your grandchildren more often, or see other friends and relatives that don’t live close by.
- To improve overall retirement – Last, but not least, a reverse mortgage can act as supplemental income, helping you afford more of what you need throughout your retirement. Whether you just want a little extra to help you pay your utility bills, or you’d like to put some money toward joining a fitness club, or you’d like to enroll in your local continuing education program, you may be able to enhance your retirement with a reverse mortgage.
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Are there any drawbacks to a reverse mortgage?
A reverse mortgage can be a very useful financial tool for some seniors; however, it may not be the best choice for everyone. There are some downsides to a reverse mortgage. One is that it may make it harder for your heirs to inherit your home after you pass away, as they will have to satisfy the reverse mortgage debt first before they can inherit the home. The good news, however, is that if they do not wish to inherit the home, or if they are unable to afford to pay off the debt, your heirs will not be penalized or held liable for the outstanding reverse mortgage balance. The home will most likely be sold, either by the lender or by your heirs/estate, and whatever proceeds are made from the sale will go toward paying off the reverse loan debt. If the home doesn’t sell for enough money to pay off the loan balance, your heirs are still not responsible for the debt. Instead, the FHA simply takes it as a loss.
Since a reverse mortgage amortizes backwards (meaning it increases over time rather than decreases) it can make it difficult to pay off, especially with a high interest rate. And since a reverse mortgage involves compound interest (where you are paying interest on top of interest), the balance can increase very quickly.
Finally, while a reverse mortgage may get the borrower off the hook when it comes to making monthly mortgage payments, the reverse mortgage borrower is still responsible for paying for things like regular maintenance, utilities, their homeowners insurance premiums and property taxes. If you think it will be difficult to afford these obligations, even with a reverse mortgage, then you may need to consider other options. Neglecting to pay your property taxes or homeowners insurance can put you at risk of foreclosure. Failing to keep the home up with regular maintenance can also put you at risk of foreclosure. This is why it is extremely important that potential borrowers understand the risks and obligations associated with a reverse mortgage and one of the main reasons why a reverse mortgage counseling session is required when you apply for a reverse mortgage.
To learn more about reverse mortgages, please feel free to explore our site and visit our online learning center.