What's In This Article?
A reverse mortgage or Home Equity Conversion Mortgage has helped many seniors face difficult financial problems and live out a happier retirement. Could it be the right solution for you, as well? Here are the top 8 reasons to consider taking out a reverse mortgage in 2021.
1. You have substantial home equity built up.
Most homeowners have at least half of their net worth tied up in their homes by the time they are 62. This equity, which is the market value of the home once debts are subtracted, is often a great source of funds to draw from. Usually, you would only be able to access the funds by selling the home, but a reverse mortgage allows you to access said equity while remaining the home’s owner.
2. You worry about your retirement funds running out.
The average American life expectancy is increasing, with ages beyond 90 becoming increasingly common. This can be problematic for your retirement savings, especially when considering that the likelihood of needing expensive medical treatment will increase as you age. Few people have the savings to support 25 years of retirement or longer, which is likely for those retiring at age 65, even when Social Security benefits are factored in.
This is one of the most common reasons for getting a reverse mortgage. By doing so, the borrowers can enjoy a lengthy retirement without worrying about running out of money for their basic needs or their growing medical expenses. In some cases, they can even retire earlier.
3. You have a bad credit score.
One of the great things about equity-based loans is that they do not require a good credit score in order to qualify. Instead, the reverse mortgage relies on the amount of equity that you have in your home. This is because the loan will eventually be paid with that home’s equity, rather than your payments to it.
A reverse mortgage allows the borrower to withdraw funds either as a lump sum, annuity, or line of credit. As a line of credit, it could effectively replace any credit card with one that requires no payments and has a lower interest rate.
4. You don’t want to pay your mortgage or other outstanding debts anymore.
A popular feature of the reverse mortgage is its lack of monthly payments. Rather than paying off the debt over time, you pay the debt off all at once, usually, once the borrower has moved out of the house or has passed away. This frees the borrower from the hassle of paying that extra bill.
What makes this even more beneficial, though, is that you can use the reverse mortgage to pay off other outstanding debts. If you haven’t paid off the original mortgage yet, then doing so is actually required when receiving the reverse mortgage. If you have enough equity to draw from though, then the reverse mortgage can also be used to consolidate or eliminate other debts, as well. In this way, you can reduce the number of bills you have to pay even further.
5. Your family is having financial problems and you want to help.
Once the loan is taken out and the first mortgage is paid, the money from the reverse mortgage can be used without restriction. This means that, if you so choose, you could pay for someone’s tuition, fledgling business, debts, a car, or even bail. Whatever the cause of financial hardship may be, a reverse mortgage would likely be able to cover the cost.
That being said, consider how much home equity you will be able to draw from. Would it be enough to cover the mortgage, the loan’s ongoing expenses such as property taxes and insurance, and the intended use, such as college tuition?
6. You’d like to downsize but are worried about future expenses.
A common alternative to reverse mortgages is downsizing the home. This is done by selling the older house and purchasing a smaller, cheaper one. It can effectively free up some of the larger home’s equity for use without having to take out a loan, in addition to getting a cozier home that is easier to traverse. Sometimes, however, the amount freed up simply isn’t enough to live out a comfortable retirement. This is why some people both downsize the house and take out a reverse mortgage on that smaller home in order to free up the money that was used to purchase it.
Some might describe this as getting a house for free, but the same conditions of the reverse mortgage apply. If the loan is not paid off through another means, then the house will have to be sold by whoever inherits the deed.
7. You want to improve the quality of your retirement.
Once again, these funds could be used for anything so long as you’ve paid the mortgage. It can pad your retirement funds, allow you to pursue an interesting hobby, or check items off of your bucket list. It can be used to remodel your home, take a vacation, or travel. The proceeds from a reverse mortgage can be used for just about anything you can think of in order to make your retirement a little more enjoyable. If traveling, though, remember to stay in the house for at least six months every year.
8. You can meet the eligibility requirements.
All of these benefits rely on the borrower’s ability to meet the eligibility requirements and the ongoing costs. These include being at least 62 years of age, living in the home for a minimum of six months per year, and remaining up-to-date on property taxes, insurance payments, and any homeowners association fees. The loan itself can help with the fees if you set enough aside for that purpose.
In addition, a reverse mortgage is only a good idea if the borrower understands and accepts the house being sold after they move or pass away. The reverse mortgage is a rather complex loan with a number of up-front costs, so it usually isn’t worth the trouble if you only wish to take out a small, one-time sum and pay it off quickly. This means that, in all likelihood, you or your heir will have to sell the house to pay the loan back if you move away or pass on.
If you list someone as a co-borrower or non-borrowing spouse, then this moment can be delayed until they also move or pass away. As long as you are comfortable with these conditions, a reverse mortgage could be a great option to consider for your financial needs.