Reverse mortgages are a fantastic option for anyone above the age of 62 who is in need of a little extra money to supplement their income and retirement funds. That being said, it is important that you are careful when setting up a reverse mortgage—you can easily be burned by a multitude of tricks and hidden fees if you are not careful. On top of this, you need to make sure you are getting a reverse mortgage for the right reasons. Lastly, make sure you read over the contract and know exactly what you are getting into to avoid any other misunderstandings.
One thing that is often underestimated in terms of importance is the effect a reverse mortgage will have on your heirs. Because a reverse mortgage gives you a loan against the equity of your home, this loan must be repaid by your heirs if they wish to keep the estate. If they do not wish to keep the estate, then they will not receive money from it. In a reverse mortgage, you are essentially tapping into your last will and testament and taking money to use in the short-term. Also, realize that you will not receive 100% of your equity—the real percentage will be underneath, but much closer to 50%. This may be necessary, but you need to make that decision for yourself.
On top of this, reverse mortgage fees can be very high. These mortgages are by no means cheap, so it is paramount that you weigh the costs and benefits before jumping into anything quickly. Understanding that there are risks that come along with these plans is vital in the process of getting a reverse mortgage. It is advisable to have a lawyer review your contract to make sure there are no hidden tricks or catches. Even if the reverse mortgage broker is being honest, there are often many things you need to take into account regardless.
Not a Substitute for a Retirement Plan
Another important thing to understand about reverse mortgages is that they are to be used as a component of a retirement plan, not in place of one. Reverse mortgages are no substitute for investment and a solid retirement plan. While they may be used to supplement your plan if you are almost there or to add a little cash to make your retirement plan cushier, avoid at all costs a retirement plan centered entirely on a reverse mortgage as this is a recipe for disaster.
Finally, you need equity to do a reverse mortgage. This means that if the housing market dips, you will have less equity to loan against and therefore less money from your reverse mortgage. In part, this is what led to the housing crash to begin with. This is a prime example of why it is important to have a well-balanced plan for retirement; if you build your plan solely on a reverse mortgage and something goes awry, there can be serious problems for you in the future.