A lot of people look forward to someday stepping away from the hassles of the working world and getting to retire. However, being able to actually end your career relies upon having the money to cover your expenses in the absence of a job. AARP notes that you'll need to replace about 80% of your pre-retirement income in order to live comfortably, and depending on your hopes and dreams for your retirement, you might want the flexibility to spend more money on travel and crossing items off your bucket list. And this is where some people run into trouble.
If you haven't been able to sock money away in a brokerage account to invest and grow it over your career, you might be lacking the savings to comfortably retire. Social Security payments will not match your old salary, and if you're a long way off from retiring, how much they cover could change over time. For some people, a reverse mortgage looks like an attractive option. But what is a reverse mortgage, and are they worth considering?
What is a reverse mortgage?
You're probably familiar with the concept of a mortgage loan. You stretch out the cost of buying a home over many years (15- and 30-year mortgage terms are common) in exchange for being charged interest on the loan by your mortgage lender. As you make your payments, you build up more and more home equity, until eventually, you've paid the loan off entirely and the home is yours outright. Along the way, you can also borrow against your home equity in the form of additional mortgages, home equity loans, and home equity lines of credit (HELOCs).
A reverse mortgage is another way of borrowing against your home equity, but the loan is repaid when you no longer live in the home. Interest and fees are added over time to the amount you borrow, and eventually, you'll have to pay the money back (along with these extra costs) by selling the home (or if you've passed on, your heirs will handle this). You can receive the money as a lump sum, in monthly installments, or as a line of credit you can draw from as needed.
The most common type is called a HECM (or home equity conversion mortgage), and you must be 62 or older to qualify. There are other conditions to meet — the home must be your primary residence, you must keep up with maintenance and property taxes, and you must not have any outstanding federal debt, like unpaid income taxes.
Is it a good idea to do this?
Like so many aspects of personal finance, deciding whether to get a reverse mortgage to help you pay for retirement is just that: personal. So I can't answer this question for you! But here's a look at the upsides and downsides of taking out a reverse mortgage.
If you've spent years building home equity, getting to access it to cover your living costs in retirement can certainly be a good thing. And you don't even have to move out, you can remain in the home you love and it'll stay in your name.
The payments you receive from your reverse mortgage aren't taxable, so that can improve your bottom line at a time of life when money can be tight. And reverse mortgages are a type of non-recourse loan, which means they are backed by the value of the home itself, rather than any other assets, so the amount due can never be more than your home is worth.
A reverse mortgage is not free, and there's no guarantee that you'll qualify. You'll have to meet the conditions noted above as well as others (for example, if you own a co-op, your home might not be eligible). And you'll have to pay closing costs, just like with a traditional mortgage. Those fees will eat into the money you'd get from your home equity.
And eventually, your reverse mortgage must be paid off. Perhaps it's your intention to leave the home to your heirs when you die, and have them handle selling it to pay off the loan (or paying it off otherwise). If not, it'll be on you to sell your home and move. And if you pass away before your spouse, they may or may not be able to remain in the home.
Finally, reverse mortgage scams abound, so you'll need to do your due diligence if you're considering going this route.
If things are looking a little tight in your retirement budget, and you have a lot of home equity, a reverse mortgage could be just the ticket for you. But consider the pros and cons, and speak with a HUD counselor if you're intending to go with a HECM (which is backed by HUD). You deserve the most stress-free retirement you can get, and this includes finding ways to cover your costs.
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