Considering a Reverse Mortgage? Does that Make You Super Smart or Completely Crazy?
People who are thinking about getting a reverse mortgage sometimes feel confident, smart and stress-free one moment and overcome by doubt the next.
Here are 5 tips to help you make a better reverse mortgage decision.
Embrace the Complexity
Your home is probably your most valuable asset — often worth more than your retirement savings. It is therefore probably worth your while to learn about your options for using it to help you have the best retirement possible.
When you get a reverse mortgage, you are borrowing your own home equity. What makes this financial transaction different from most other loans is that you don’t make any monthly mortgage payments — the loan is repaid (usually by selling the home) only when you move out but neither you nor your heirs will ever owe more than the value of your home at the time the loan becomes due.
Misconceptions about reverse mortgages are common. As an example, a survey conducted by Davidooff, Gerhard, and Post found that only one third of the respondents knew that reverse mortgage borrowers can stay in their home even if they owed more than it was worth. Learn more about the pros and cons of these loans or discover 3 underreported facts about reverse mortgages.
Learn By Exploring Your Own Situation
You can read articles about reverse mortgages, but using different kinds of reverse mortgage calculators can be one of the best ways to get your head around how these loans work. Calculators can enable you to discover how these loans will impact your own life — these tools can make the loans more understandable and personal.
Try one of these options:
- Reverse mortgage calculator: A simple tool that let’s you see your estimated loan amount.
- Reverse mortgage suitability quiz: Get a quick answer about whether or not you should consider this loan.
- Reverse mortgage retirement planner: This is a simplified version of a sophisticated retirement planner. It can help you see the impact a reverse mortgage has on your overall retirement finances.
- Retirement planner: This tool will take you 20 – 30 minutes to explore. You begin by entering information about your current finances and will then get a detailed analysis of your situation. Next, make changes or add more details for a reliable assessment of your financial future. You can even do various “what if scenarios” to see the impact a reverse mortgage will have on your estate, cash flow, whether you will run out of money and more…
Understand the Short and Long Term Costs of a Reverse Mortgage
One of the most common complaints about reverse mortgages are the upfront costs.
Human beings are programmed to give too much weight to the short term gains and losses. So, many people reject a reverse mortgage because there are upfront costs associated with the loan — even though there will be financial benefits for years and years to come.
Expert analysis suggests that if you will benefit from a reverse mortgage for at least 5 years, then the upfront costs should be considered negligible. Explore this complete guide to reverse mortgage fees.
Balance Your Short and Long Term Needs
Your home can perform various functions in retirement. Your home is a place to live and a source of emotional comfort. It is also a potential source of money to fund future medical or long term care costs as well as a possible asset to pass on to heirs.
Balancing the various functions of your home — both now and as you age — is one of the most important reverse mortgage considerations. When and how to use the funds from a reverse mortgage can impact how you live now and well into the future.
- If you owe nothing or little on your home, many financial advisors actually recommend that you get a reverse mortgage now and keep the loan proceeds in a line of credit. This strategy insures that your home equity is preserved, will grow in a predictable way and insures that the money is available to you if you need it. And, because you don’t pay interest on the money in the line of credit, the costs of doing this are relatively small.
- If you are considering a reverse mortgage as a way to eliminate mortgage payments to improve your monthly cash flow, then you might want to wait to do the loan when you really need it
Research from the Boston College Center for Retirement Research has found that fear and misunderstanding do indeed cause inertia and make people avoid these loans even though they are a rational smart choice for many seniors.
Start exploring the impact of a reverse mortgage on your retirement.