Retirement Planning

Can A Reverse Mortgage Be A Good Source of Retirement Income?

Think you might use a reverse mortgage for supplemental retirement income? There are pros and cons to a reverse mortgage so it is important to do your research.

Understand How A Reverse Mortgage Affects Your Assets

What is a reverse mortgage?

If you watch TV, it isn't hard to see a commercial promising a way to pay you to live in a home that you already own. Sounds great, but what's the catch? They are talking about a reverse mortgage, and it's important to know the facts. A reverse mortgage accesses part of the equity in your home and turns it into a form of supplemental retirement income, provided you are 62 or older and own the home outright, or have a very small mortgage left on the home. A reverse mortgage is exactly what it sounds like: the lender actually sends you, the homeowner, a monthly payment drawn from the equity in your home. You can also choose to receive your reverse mortgage in one lump sum, or simply use it as a line of credit. As the homeowner you would still be responsible for paying property taxes, home insurance, and maintenance costs, and failure to do so can result in the forfeiture of your home.

If looking to supplement retirement income with a reverse mortgage, it is critical to understand the impact it could have on one of your greatest assets - your home. It's important to understand that a reverse mortgage typically only represents part of the value of your home, usually no more than 65 percent of your home's actual value. For some, the most appealing aspect of the reverse mortgage could be that it looks to provide a sizable boost to your retirement income, and the debt does not have to be repaid as long as you are still living in your home. Payments are not required until the borrower dies, moves out for more than 12 months, or sells the home. 

Who benefits from getting a reverse mortgage?

Seniors who find they do not have sufficient savings and retirement income to retire comfortably may benefit the most from a reverse mortgage. Retirees who do not have a steady stream of income or even good credit may still be approved for a reverse mortgage. There are a variety of private lenders who offer reverse mortgages, and there is also a popular federal option called the Home Equity Conversion Mortgage (HECM) offered by the Federal Housing Administration (FHA). While reverse mortgages were originally intended to assist seniors with cost of living and healthcare expenses, there are no limitations on how funds can be used.

What are the possible downsides of getting a reverse mortgage?

The most obvious downside to getting a reverse mortgage is that you will not be able to leave your home to your heirs, unless they can pay the balance of your reverse mortgage loan. If they can't, they'll only inherit the remainder of the proceeds from the sale of your home after the reverse mortgage loan has been settled. 

There can be a myriad of fees and smaller expenses associated with a reverse mortgage that can add up. Loan origination fees on reverse mortgages can cost several thousand dollars. You can either pay this fee upfront or fold into your loan, depending on the terms of your reverse mortgage. Homeowners will be expected to pay for any initial home inspection costs. Reverse mortgage recipients are also required to carry a mortgage insurance policy, which will add to your overall cost.

The HECM has an attractive fixed, low interest rate, and is federally insured, but private lenders can sometimes offer you a much larger reverse mortgage loan.

If you'd like to know more about estate planning topics such as final-expense life insurance, creating a legally binding will, or updating an existing will, you can find the information you need in the Protective Learning Center.

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