The Pros and Cons of Reverse Mortgages
by Tony RovereTony Rovere, with seniors' issues at heart, explains the pros and cons of reverse mortgages.
More people are retiring than at any point in our nation’s history. As more and more baby boomers turn into senior citizens, there will be a retirement explosion in this country. These boomers-turned-seniors worry about whether they will be able to finance the next 20-30 years of their lives.
The Upside of Reverse Mortgages
- Ease of qualification. Since the reverse mortgage loan amount is based solely on the value of your house and your age, there are no credit checks involved. It is your house that qualifies for the mortgage, not you and your credit.
- Non-recourse provision. Non-recourse means that you can never owe more than the house is worth. This protects your estate from having to pay additional money to the bank in the event that your house eventually sells for less than the total loan amount.
- This is loan money, so the proceeds are tax-free.
- Live independently. A reverse mortgage will enable to stay in your home by providing you with the money to pay your bills.
- No limitations. It's your money. You can use it for whatever you want.
- Mandatory counselling. Reverse mortgages had a bad reputation because of instances where seniors made poor decisions about the fees they were paying to obtain the mortgage and also what they were using the mortgage proceeds for. Now, because of the previous problems, there is mandatory counselling required before the loan can be given. An impartial counsellor will take a look at the loan proposal and provide you with potential alternatives that may be more advantageous for you.
For example, if you are looking to get the loan to perform home improvements, you may find in the counselling session that there are government weatherization programs that would perform the repairs to your home at a fraction of the cost of the reverse mortgage.
The Downside of Reverse Mortgages
- Reverse mortgages tend to be a REALLY expensive way to borrow money. The fees can be high and this is one of the reasons that you need to speak with the counsellor to determine whether or not the reverse mortgage is suitable for you.
- Will it provide you with enough money for all of your needs? This is the point that I was alluding to in the beginning of the article. Many boomers are turning to reverse mortgages earlier and earlier. The problem with this is that the younger you are the less you will receive in reverse mortgage proceeds. That may not be enough to last you through your retirement.
Of course, you could make the argument that you could take another reverse mortgage later in life, but the problem there is that you are paying fees twice instead of once.
- And finally, some people aren’t very good with large sums of money. Could you be talked into a shady investment? Do you follow very poor budgeting habits? If so, then a reverse mortgage may not be for you and this is another reason that you need to talk to your counsellor.
The bottom line is this. If you are equity-rich and cash-poor, a reverse mortgage may be part of your retirement plan. But it is an option that needs to be considered carefully because you really need to do some planning and soul searching to see if the money you end up obtaining from a reverse mortgage will in fact be enough to sustain you through retirement.
About the author:
Tony Rovere became an advocate for senior citizens and senior-health issues after having to deal with the complexities of the Medicaid process following his mother’s heart attack.
He now shares his insights on caregiving and senior issues at his blog, Stuff Seniors Need, which was created to help not only senior citizens but the baby boomers who are now their caregivers.
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