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March 27, 2017
Most of us are concerned about our retirement financial security. We have not saved enough. Healthcare is expensive. Social Security doesn’t nearly cover our costs. We are living long lives.
However, many of us do have one very big source of wealth. According to the US Census Bureau, 79% of older Americans own their homes. And, for most of us, our homes are — by far — our most valuable financial asset.
The question then is:
Should we use our home equity to help fund retirement?
If so, why aren’t more of us doing it?
As with any financial decision, there are a lot of factors that need to be considered. Reverse mortgages are not a one size fits all arrangement. However, these are some of the primary considerations to ask yourself when deciding if a reverse mortgage will be right for you:
Needs and Wants: When trying to figure out, “should I get a reverse mortgage,” the most important consideration is whether you need (or want) additional funds for retirement. There is no question about it, a reverse mortgage gives you a lot of flexibility, financial freedom and choice.
Pay Off Mortgage: Would you live a more comfortable life if you could eliminate existing mortgage payments.
Efficient Planning: Even if you don’t need the money or improved cash flow now, you should think about whether an additional source of funds could be helpful at some point in the future. Many people get a reverse mortgage line of credit in order to increase their financial flexibility. The line of credit is an efficient way of setting up the reverse mortgage since you won’t pay interest until you withdraw funds.
The money is there if and when you need it.
Age in Place: You should only consider a reverse mortgage on your current residence if it is where you want to spend the rest of your life — or at least another 5 years.
Qualifications: To get a reverse mortgage, you must be 62, own your home, have sufficient equity and show adequate funds to maintain insurance and property taxes on the residence.
A recent study from the Urban Institute found these 5 key reasons that many people avoid reverse mortgages.
1. Desire to Avoid Debt
Researchers found that seniors “tend to have a general desire to stay financially conservative and avoid debt in old age.”
While avoiding debt can be prudent, the right kind of debt can also be a powerful financial tool to enhance your overall financial well being.
Reverse mortgages are definitely loans and you do accumulate debt. However, you are borrowing your own home equity. You have worked very hard to buy your home and pay off or reduce your mortgage. There is no reason to feel bad about tapping this money.
In fact, you probably saved less for retirement exactly because you needed to pay down your mortgage.
Furthermore, reverse mortgages are a very different kind of debt than say paying with a credit card. Many personal finance experts who would sternly tell you to avoid credit cards would also highly recommend a reverse mortgage in the right circumstances.
Learn more about the pros and cons of reverse mortgages.
2. Fear of Getting Scammed
Reverse mortgages are heavily marketed and there is a perception that some lenders want to scam seniors.
However, reverse mortgages are heavily regulated with a wide variety of very strong consumer protections.
If you are concerned about getting scammed, be sure to work with a reverse mortgage lender who is approved by the Federal Housing Administration (FHA). Learn more about finding a licensed and reputable reverse mortgage lender.
3. Ability to Work Longer
Another reason that reverse mortgages are sometimes avoided is that more older Americans are able to work longer. Working is one of the best ways to fund a longer life and there are many other health benefits as well.
However, just because you can work, does not mean that you shouldn’t assess all of your financial resources and make a long term plan that may include a reverse mortgage.
4. We Don’t Have a Long Relationship with Reverse Mortgages
Most of us hadn’t heard of a reverse mortgage until we were already retired. It is unlikely that your parents or grandparents got a reverse mortgage. But, that does not mean that it is something for you to avoid. (After all, your parents probably didn’t use computers or cell phones either… )
5. Reverse Mortgages Are Confusing
Reverse mortgages can be hard to get your head around. The rules can sound a little crazy:
One of the best reasons to contact a reverse mortgage lender is to be able to set up an appointment with a reverse mortgage counselor. Their job is to help you understand this product.
Explore “Your Guide to Reverse Mortgage Counseling” or learn more about Reverse Mortgage Facts.
If you are not quite ready to talk to a reverse mortgage lender and you are tired of reading articles, you might want to try one of these tools to see how a reverse mortgage would work for you and your financial situation:
Reverse Mortgage Suitability Quiz: Answer a few questions and see if a reverse mortgage might be suitable.
Reverse Mortgage Calculator: Find out how much you can borrow.
Reverse Mortgage Planner: See how a reverse mortgage fits into your overall retirement plan.
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