Being retired doesn’t mean that you don’t need a good source of income anymore. Utilities, food, gas, and pretty much everything continues to become more expensive each year. The large majority of seniors have limited incomes, so they will be the most affected by these increasing expenses.
One choice that retirees who need cash have is to take out a reverse mortgage. Reverse mortgages are pretty popular right now, and a good alternative to other loans, but they might not be such a smart investment. Yes, reverse mortgages can provide you with that extra income, but, as an investment, a reverse mortgage is a poor choice.
What is a Reverse Mortgage and How Does It Work?
A reverse mortgage is a type of loan which is only available to seniors over the age of 62, and which uses the equity in the borrower’s home as collateral. This loan is designed to help home owners who are in or near retirement and have limited incomes. The borrower’s existing mortgage will have to be paid off in order for him or her to qualify for a reverse mortgage, and there are no credit score requirements. The money borrowed through a reverse mortgage can be used for many things, such as paying off other debt, medical bills, or paying for utilities and food. There are pretty much no restrictions to how a borrower can use the reverse mortgage proceeds.
The borrower can choose to receive the money from a reverse mortgage in three ways: as a lump sum of money, meaning that the borrower receives all the money at once, as a monthly payment for as long as the borrower lives or until the home is sold, or as a line of credit which is similar to a credit card. If the borrower chooses to, the money can be received as a combination of these three methods.
A reverse mortgage can be expensive because there are no standard charges, so the fees will depend on the lender and type of loan. The borrower will have to pay a mortgage insurance premium, monthly lender fees, and several closing costs. The amount that you can borrow depends on which method you are using to take out the money, how much equity is in your home, and the borrower’s age.
Why is a Reverse Mortgage Not a Smart Investment
A mortgage is considered a good investment only when you live in a home for a long time. When taking out a reverse mortgage, you can turn it into a good investment by living in the home for over 5 years, but the odds are stacked against you at that age. If you become ill and have to move into a nursing home, the monthly reverse mortgage payments will stop. Also, taking the whole amount out at once can turn ugly if you are unable to manage your finances properly. Once that money is gone, you won’t be able to take out another reverse mortgage.
Reverse mortgages also have high closing costs and other fees to pay. Because the lender doesn’t require you to have a certain income or credit score, he must take certain precautions to ensure that he doesn’t lose money, so your interest rate and fees will be higher than on a regular mortgage.
Also, after you die, your heirs will probably have to sell the home in order to pay off the debt, so they will be left with very little or nothing. If you decide to move out at a certain point after taking out a reverse mortgage, you will have to pay off the debt, and this might prove difficult at a time when money is tight.
A reverse mortgage can be a life saver when you truly need it, but it is not a great investment. An alternative to taking out a reverse mortgage and leaving your heirs with debt would be to reorganize your budget, or even ask your children for help. The high cost and the problems that may arise if you wish to move out of your home or leave it to your heirs can make reverse mortgages something that you are better off avoiding.