If you don’t really need the cash and don’t have any other way to get it, I would advise you to steer clear of obtaining a reverse mortgage. This is just my own opinion, however. My main concerns are that they are more costly than a standard mortgage, that you must pay for the fees of setting it up (such as an assessment), and that there is a genuine risk that many borrowers will be unable to responsibly handle the additional funds they get.
From what I understand, you are not required to take all of the money at once but may draw it down as needed. However, there is a strong temptation to draw down more than you immediately need so that you can spend it, “lend” it to friends and family, support “good” organizations, and so on.
Having said that, if you absolutely really need money to live on, have equity in your house, and are older than the cut-off age, then it is a simple method to access your funds. However, this option is only available to those who meet all three criteria.
Keep in mind that you won’t have to pay it back until you either sell the house or pass away and if the value of the house drops, the lender will be the one to deal with the risk rather than you.
It is important to keep in mind that in addition to paying for repairs and house insurance, you will also be required to pay property taxes on the home. It’s possible that this is a really huge amount that keeps coming back to bother you. One of the factors is whether or not the two of you are married; if you are, then both of you must pass away before the lender may seize the house.
The next question to ask yourself is whether or not there is anybody who will be in desperate need of financial assistance after you are gone. How odious are your financial obligations? How old is the house, and will it need significant repairs in the near future, such as a new roof, etc.? Imagine if the house you now call home is worth $6,000 today.
You and your wife decide to acquire a reverse mortgage, but then two years later, you and your wife are killed in a vehicle accident. Now, consider if the individual named in your will has sufficient funds or credit to repay the money that was stolen by the lender. It is possible that the person who would inherit the house may be forced to sell it, which might result in a significant loss.
The costs associated with reverse mortgages, including interest rates and other fees, are often higher than those associated with regular lines of credit or home equity loans.
When the homeowner dies away or moves out of the house, the reverse mortgage becomes payable in full.
Therefore, if the homeowner is in bad health and discovers that moving into a long-term care facility is essential, the family is likely to be left with a tough option (and additional financial headaches).
In most cases, the borrower is obliged to maintain the property in excellent shape and to keep the property taxes up to date. If the borrower fails to do the necessary maintenance or gets behind on the taxes (which is not unusual among older people), the reverse mortgage might go into default. If there are going to be successors, this is the very worst decision that someone could make, in my view.
Because the borrower is not responsible for making payments toward the principal balance of the loan, the lender is able to charge a higher interest rate, which is then compounded as long as the mortgage is outstanding (this is known as negative amortization). Because the borrower is not responsible for making payments toward the principal balance of the loan, the loan balance accumulates interest on the interest that has not been paid.
There is usually a cap placed on the total loan amount to ensure that the mortgagor will not incur any financial loss in the event that the loan is never repaid. After a borrower has exhausted the maximum amount of his loan and his income has decreased to the level it would have been if he had not taken out the mortgage.
There is a possibility that the borrower would fail on his share of the agreement to pay taxes and insurance. If this scenario played out, his home would be foreclosed on, and he would be compelled to find some other kind of housing.
Or, when the borrower ultimately passes away, the lender has a very strong probability of exercising their right to foreclose on the mortgage and purchasing the property for an amount that is far lower than what the property is really worth.
In these kinds of situations, the inheritors almost never have enough money to be able to refinance the property and pay off the loan. Therefore, the heirs get nothing, and the lender acquires the property for a far lower price than it is worth.
If you have a friend or family who is thinking about getting this kind of mortgage, you should encourage them to meet with a credit counselor so that they can find out what other choices could be available to them and which ones might be a better fit for them.
Even if you have a reverse mortgage on your home, you may still be able to leave it to a family member as an inheritance, or at the very least, whatever equity is left in the property after the mortgage has been paid off.
After you have gone away, your heirs have the option of paying off or refinancing the reverse mortgage debt that you have accrued, selling the property and keeping any leftover value or turning it over to the servicer if that is what they would choose to do with it.
Even if you don’t “need” it and/or have other choices at your disposal, getting a line of credit secured by your reverse mortgage is a smart move for your financial planning, even if it’s not required. The product is truly unique in that it combines a line of credit with a very long-term and open-ended term, and this combination can provide a cushion for an investment portfolio for short- to medium-term retirement spending.
This cushion can help retirees avoid selling investment assets during a downturn in the market. When used in this manner, the expenditures that are incurred to get assured access to such a line of credit are worth it. Having said that, it’s a poor idea if there’s a chance you won’t be able to resist the temptation of spending it on things that will blow holes in your financial plan.