When is a Reverse Mortgage Right?

Written by: Scott Sery

Throughout your life you have worked hard to make a living, pay off your debt, and save for retirement.  Now the time has come to sit back and enjoy the fruits of your labor.  The defined contribution pension is providing what you need for the first few years of retirement, but as the costs of living start to go up, you realize that there is need for a little more money to make ends meet.  Going back to work is not an option, so you start looking for alternatives.  If you’ve paid off your mortgage, it is likely your largest financial asset.  One option that allow you to use the value of your house is a reverse mortgage, but is it right for you?

With a reverse mortgage, instead of making mortgage payments to the house, the reverse mortgage company will make payments to the homeowner.  It can be thought of as a small loan each month.  The homeowner retains all the rights to the property, that is they remain the owner of the house; the mortgage company has a lien put on the house.  If the homeowner moves or dies, the loans must be repaid or the reverse mortgage company may take the house.  The reverse mortgage can be a lump sum, a monthly check, or a combination of both.  A deciding factor whether or not to set up a reverse mortgage is your age.  Reverse mortgages are only available to those ages 62 or older.

A less-viable alternative, similar to a reverse mortgage, is to simply refinance a portion of the home.  The owner would just go through the refinance procedure, taking a cash out option.  Some of the money would be used for living expenses, and some would be used to pay back the loan.  This may be an option for those under age 62, but it most likely would not fit many people’s financial situation.  Those on a fixed income may have trouble refinancing in the first place since they would not be able to prove a high enough income to prove to the lender that they can make the payments.

The bottom line is that nobody wants to have debt.  It feels great to have the house paid for and to be enjoying retirement, but struggling to make ends meet is no fun even during the working years.  After you are unable to work, it is an even worse feeling.  So for many seniors, the reverse mortgage can be a real option to help supplement their retirement income.  It is best to discuss it with the whole family, especially heirs, and really understand the product before making any commitments, because it means that in most cases you won’t be able to pass your house along to your children.


When is a Reverse Mortgage Right?

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