Reverse mortgages can help us successfully age in place during retirement, while also providing some extra cash flow via the most valuable asset most of us own: our home.
But like all financial products on the market today, reverse mortgages are not for everyone and there are some things to consider when determining if these loans are a good idea or not.
Does a Reverse Mortgage Represent Clear Blue Skies?
Reverse mortgages allow homeowners ages 62 and older to borrow against their home equity, helping to unlock their home’s value by eliminating ongoing mortgage payments and giving access to tax-free money, which can be used however the borrower chooses.
Unlike a traditional mortgage loan, reverse mortgage borrowers do not make monthly mortgage payments to the lender. Rather, homeowners receive payments against their own home equity. The amount of money a borrower is eligible to receive depends on the age of all titleholders, the appraised value of the home, and current interest rates.
(To see how much you might qualify for, try using a reverse mortgage calculator, or try our Reverse Mortgage Suitability Test to see if the loan product is a good fit for your financial plan.)
1. Is it the Right Home for the Rest of Your Life?
When considering a reverse mortgage, we need to ask ourselves whether our goal is to stay in the home for the foreseeable future.
One of the main characteristics of a reverse mortgage is that the loan does not become due and payable unless the home is sold or otherwise vacated. That means if you have a reverse mortgage and decide to relocate, be it for pleasure or health reasons, then the loan would become due.
For this reason, it is important to consider from a longevity standpoint whether a reverse mortgage is suitable for your particular needs, both now and down the road.
Say your current home has at least two floors. While it might be manageable to move about and maintain its upkeep at age 65, is it still going to be the right solution for you when you’re 85?
2. What Is Your Long Term Care Plan?
Another common scenario we all need to consider is what happens if we need long term care. Will proceeds from the reverse mortgage cover these costs for care in our home?
What will happen if we end up in a nursing home?
Reverse mortgages are complex financial assets that require a great deal of research and analysis to determine if they are right for your particular situation.
3. Do You Have Financial Stability? Will a Reverse Mortgage Help You?
Many people think that a reverse mortgage is a product of last resort for people who have used up their retirement resources.
However, that is not entirely true. Many of us have worked hard, have planned our retirements and are continuing to plan, including considering a reverse mortgage.
It is proof of our financial diligence that we own a home at all.
Reverse mortgages are best used by people who have a strong financial plan for the rest of their lives.
And, in fact, reverse mortgage lenders are now requiring a financial assessment of all borrowers. When applying for a reverse mortgage, the lender will consider certain aspects of the borrower’s financial history to confirm they have the ability to meet the loan’s obligations, which include keeping up with property taxes and homeowners insurance.
In conducting their financial assessment of a borrower’s ability to pay, lenders may require proof of income information from documents like pay stubs, W2 forms, and Social Security documents, and statements regarding any assets such 401(k)s and IRA accounts.
If there is something in your financial assessment that suggests that you won’t be able to pay your property taxes and insurance payments after you receive a reverse mortgage, then the lender can set aside funds from your loan proceeds to cover these expenses in the form of a “LESA,” or a life expectancy set-aside.
It is important to note that these set aside funds, if needed, limit the amount of reverse mortgage proceeds you will have access to throughout the life of the loan. Depending on how much proceeds are left after calculating for taxes and insurance payments, you will have to consider whether a reverse mortgage makes sense for your retirement plans.
While there have been a number of reverse mortgage calculators on the internet to help determine how much money we can get from the loans, there has not been any tool that helps us to determine if it is a loan that we should really consider.
The Reverse Mortgage Suitability Test is a quick quiz that can help us assess our suitability for the loan. If you are considering the prospect of getting a reverse mortgage and would like to get an idea of whether the loan might be a good fit for your retirement plans, give it a try.
