Reverse Mortgages for Seniors
November 11, 2009
If you or your parents have lived in your home for many years and have built up a lot of equity in the property you may have heard about or considered a reverse mortgage as a potential source of income during retirement. There seems to be a wide divide in opinions on whether reverse mortgages are a wise way to leverage equity in a home or a detrimental financial move for living out the golden years.
According to financial advisor Paul Escobar of U.S. Wealth Management, when it comes to reverse mortgages, “Seniors and their advisors should consider them, especially when their sole income and asset is their house.” Today we’ll take a look at how a reverse mortgage works and the benefits they have to offer retirees and seniors.
What is a Reverse Mortgage
A reverse mortgage is the direct opposite of a traditional mortgage because the mortgage lender makes monthly payments to the homeowner. A reverse mortgage is an option available to homeowners that are 62-years of age or older that own a primary residence free and clear of any mortgages or liens. The home also has to have a sufficient amount of equity—what is deemed as sufficient varies by the lender.
There may be other requirements from the lender but credit does not play a role in the qualification process. When homeowners qualify, the mortgage payments can be taken as a lump sum or in monthly installments. Since the amount of the reverse mortgage is based on the amount of equity, interest rate and the borrower’s age, the amount of the mortgage can vary.
Reverse Mortgage Benefits
While all reverse mortgage holders have their own reasons, there are some popular reasons that seniors opt for a reverse mortgage. Jason Roberts of Frost Lending Group points out that the fees for a reverse mortgage are similar to a conventional loan and the interest rates for reverse mortgages are generally lower. He’s helped a range of clients with reverse mortgages—some couldn’t pay for their basic needs, while others had a decent amount of savings but wanted to eliminate their mortgage payment.
Retirement
Medical Expenses
Increased cost of living, rising healthcare costs and a decreasing income do not necessarily work in harmony, but is the situation that leads many retirees to a reverse mortgage. Rather than forcing retirees to choose between paying their living expenses and paying for medicine and healthcare, the extra money that reverse mortgage provide allow seniors to pay for all of their needs—medical and daily living.
Home Accommodations
Some retirees use the money from reverse mortgages to make necessary modifications to their home. It may be widening doorways to accommodate the use of a walker or wheelchair or building a ramp to get up and down the stairs. Reverse mortgage payments can cover these costs.
Extra Money
With more time to travel and participate in leisurely activities, money from a reverse mortgage can provide extra spending money. It pays for trips, vacations or activities such as golf and days at the spa. It is an added bonus that allows them to enjoy some of the luxuries in life.
Go Debt Free
With another source of income for normal living expenses, many retirees use reverse mortgages to reduce or deplete debt. Without debt, the reverse mortgage money becomes additional cash flow that can be applied to other expenses.
After a discussion in her own mind and with her daughters, 77-year-old Francine Trevins opted for a reverse mortgage on her Manhattan loft. Francine says she has a wonderful life now because she is relieved of the “burden of a mortgage.” Her only concern is outliving the mortgage amount.
When it’s Right
Whether a reverse mortgage is right is different for each person. Talk with your financial advisor, tax consultant and estate attorney to go over the specifics of your situation. Don’t make a decision on what someone else has done because situation-specific reasons why reverse mortgages work or not vary too much.
Some of the questions you want to answer:
- Is there family you want to leave the home to?
- Do you have sufficient income to live out your retirement years?
- What plans do you have for retirement? Continue to work part-time? Travel?
- How old are you?
- Is there equity in the home? Is your home paid off?
- Do you have other sources of income?
Reverse Mortgage Dangers
Even the experts agree that there are drawbacks to reverse mortgages in some situations. In a future article we’ll take a look at the potential dangers of reverse mortgages and what to look out for.
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