Whether or not to get this loan isn’t universally a “good idea” or “bad decision” – many different factors need to be considered.
In this article, we unpack 4 considerations to determine if a reverse mortgage could be the right loan for you.
4 Compelling Advantages of Reverse Mortgages
1. Get breathing room for your budget
A reverse mortgage could be a good idea if you’re “house-rich but cash poor.” In other words, you own your home outright (or have paid off the bulk of your mortgage) but don’t have much cash flow.
If you have a significant amount of home equity but not a whole lot of ready cash in your bank account, it could make sense to utilize your available resources by tapping into that equity.
For example, if your budget is strained by ongoing monthly expenses such as medication, food, or utility bills, getting a reverse mortgage can help cover your everyday living costs and give you some breathing room in your budget while allowing you to remain in your home.
In another scenario, you still owe quite a bit on your current mortgage, and a reverse mortgage will only give you enough to pay off your existing loan.
Some might ask why this would make sense if you can’t get any money out of the house, but for others, it could be a good idea to take out a reverse mortgage in a lump sum and pay off your mortgage once and for all and be able to breathe easier knowing there are no more monthly mortgage payments.
You would still be responsible for paying your taxes and insurance, but could you eliminate your monthly mortgage payment? So that you know, only you can decide that.
2. No income requirement – alternative to HELOC
Suppose you want to make a home. Repairs or alterations to make it more livable and realize that to do the work, it will be necessary to take out a line of credit for certain expenses.
Suppose you don’t qualify for a Home Equity Line of Credit (HELOC) because of income or credit requirements, as many senior borrowers on fixed incomes are now finding. Many homeowners get to that point where they need a home.
With the reverse mortgage line of credit option, you won’t need to worry about typical qualification requirements. And you don’t have to worry about whether or not things will get too tight in your budget by sending monthly payments to the bank since there are no monthly mortgage payments on the loan.
3. Preserve retirement assets
It would be best to talk to your financial adviser about using a reverse mortgage as a viable financial tool. Many portfolios have seen extreme declines in value, and people are hesitant to lock in losses by selling out of those investments at a low point, thus depleting retirement assets.
With the careful planning and advice of your financial expert, the reverse mortgage allows you to continue to live in your home without depleting your assets.
Remember that this is not financial advice and that only you and your trusted financial advisor can make this decision…but the reverse mortgage gives you another option to consider.
4. Improve the quality of retirement
And then you don’t necessarily have to struggle to make ends meet to consider a reverse mortgage either. You could take out a line of credit if you encounter unexpected expenses, use it for Christmas gifts for your grandkids, travel, or whatever you choose.
You can use a little and keep your costs down with the HECM line of credit to preserve equity for family and heirs, or if you don’t have any children or heirs and don’t have a plan for your home for after you’ve passed, then a reverse mortgage could be used as a way to improve the quality of your life in your retirement years.
It’s entirely up to you. So while a reverse mortgage isn’t universally a “good” idea for everyone, there are plenty of situations and circumstances where getting one of these types of loans could positively impact your life.
4 reasons not enough? Here are 6 more:
4 Crucial Drawbacks of Reverse Mortgages to Consider
1. If you plan to sell your home and relocate to another area in the near future
A reverse mortgage is a loan designed for borrowers who wish to remain in their homes and free up property equity to eliminate their current mortgage payments, and other debts, enhance retirement funds or fund private healthcare matters, etc.
If your ultimate goal is to relocate to another area to be closer to family or downsize to a smaller home, a reverse mortgage may not be the best option for you as the reverse mortgage balance will rise over time.
2. If you are on government-sponsored programs such as Medicaid
Specific programs such as Medicaid have guidelines for individuals involved in the programs based on their income and available assets. Taking out a reverse mortgage loan and accessing large sums of cash from the home’s equity may invalidate an individual’s ability to qualify for such programs.
If you’re a recipient of needs-based programs such as Medicaid or SSI.
3. If you still cannot afford the Taxes and Insurance, you need to consider other alternatives
You are still responsible for paying the property taxes and hazard insurance and maintaining your home, even though you no longer have monthly mortgage payments. If this is still a struggle and you cannot afford to live comfortably, even after you get a reverse mortgage, you must make some hard decisions; sooner is better than later.
A reverse mortgage will allow you to live in your home for the rest of your life as long as you can maintain it and pay the taxes and insurance. If you cannot, eventually, you will default on the taxes and insurance, which would also be a default on the reverse mortgage loan.
Suppose this is inevitable because you still cannot afford them. In that case, even though no one wants to move out of the house they love, it may be time to make that tough decision before a default situation, and you have even less equity to re-establish yourself elsewhere.
4. If your health is poor and you do not think you can remain living in the home
The terms of a reverse mortgage require you to live in the property as your primary residence. If you are already in poor health and looking into possible long-term care in the near future, a reverse mortgage may be the wrong choice for you as your loan wouldn’t allow you to live outside the home for more than 12 months.
Are reverse mortgages good for me?
When is taking a reverse mortgage a bad idea?
What is the downside of a reverse mortgage?
What happens if you outlive your reverse mortgage?
What are the typical complaints about reverse mortgages?
ARLO recommends these helpful resources: