My husband and I are both retired, and we own our home but we have a small income. I’ve heard people talking about reverse mortgages. Are they a good idea?
A reverse mortgage can be a good idea, but it depends on your own circumstances. There are a number of different products on the market, some called “reverse annuity mortgages”, and some simply “reverse mortgages” and even “reverse personal lines of credit”. It’s very important to know what your needs are, as well as what you can expect with any one of these options.
The general idea behind a reverse mortgage is to help homeowners like you, who are perhaps retired or semi-retired and need cash, to use the equity in your home to generate income. A financial institution or lender will set up a reverse mortgage on your home and the money is paid to you either as a lump sum or a series of installments, depending on the type of reverse mortgage you arrange. Then you can use the cash to meet your needs. At the end of the term, you have a mortgage on your home. How you will make the mortgage payments at that time is an important consideration in your planning. (If you plan to sell your home, the mortgage would simply be repaid in full on the closing date of the sale, if the resale price were greater than the value of your mortgage.) Before You Act- Be sure you are comfortable with the idea of an increasing level of debt on your home: Since payments are deferred, interest compounds until the mortgage is paid. Be sure you have a plan to pay off the mortgage, know what to expect, and can manage it comfortably.
- Ask the bigger questions: It may not be in your best interest in the long term to stay in your home, and a move to a new location might help you meet both your short-term need for cash, and long term need for a more manageable place to live.
- Research all your choices: If you decide to go down this road, do seek independent legal advice before finalizing your decision.
- Ensure you are comfortable with your choices: Pressure to act can come from many people, whether they are family members or salespeople. Think about whether a reverse mortgage suits your needs, not someone else’s.
- legal fees to register the mortgage, search the title, and prepare the documents
- appraisal fees and application fees for the lender
- additional legal fees for seeking independent legal advice
- mortgage insurance premium (you insure the lender)
- administrative costs, one-time or ongoing
- cost of a new property survey, if required