Some seniors may be considering a reverse mortgage as a supplementary form of income to help them pass into the early stages of retirement. Assuming you are age 62 or over and have at least partial equity in your home, it seems like a no-brainer to seek out a reverse mortgage. What is the downside to getting money for a home you are still living in? Why not supplement your pension or social security payouts?
It is important to exercise caution, though, in these situations as reverse mortgages are definitely not useful or necessary for everyone. If you are on the fence about whether or not to get a reverse mortgage and want to know what things to take into account, then read on!
Understanding Reverse Mortgages
The first question you need to ask yourself is: do I fully understand reverse mortgages? This includes things such as the line of credit vs. lump sum debate, knowing pros and cons inside out, and understanding things such as fixed and adjustable rates.
In addition, you should not get into a reverse mortgage without truly understanding the implications of signing away your equity. Know that you will most likely get less than fifty percent of the equity in your home and that you will lose possession of the estate upon dying or moving out.
The main implication of understanding how reverse mortgages work is deciding whether or not you need one. This means taking what you know about reverse mortgages and applying it to your financial situation.
What many people seemingly do not understand is that if any deal seems too good to be true, it probably is. There will always be tradeoffs; finding the right option for you is about locating the tradeoff that is beneficial, yet necessary for you.
Affording Reverse Mortgages
Secondly, you need to decide if you can afford to take out a reverse mortgage or not. This can be divided up into two sections: affording the actual fees of reverse mortgages and affording using up your equity at this stage in your life.
Some common fees include origination fees and interest charged over time. The earlier you take out money with a reverse mortgage, the quicker the interest will compound and the more you will have to pay in interest over time.
On top of this, there are many other factors to consider with regard to the timing of your reverse mortgage. For example, what if you have an emergency in the future and need money quickly but have already taken the majority of money out of your reverse mortgage? Planning for anomalies is not to be forgotten.
Lastly, you need to weigh a reverse mortgage against other options such as refinancing or downsizing. If you can afford to use another method and retain the ability to pass down your estate to your heirs, maybe that is the right option for you.
All in all, it depends on your specific situation. The bottom line is that you need to spend time researching and thinking deeply about where your future is taking you before jumping into such a big decision.