Is a Reverse Mortgage a Bad Idea?
Getting a reverse mortgage may sound like a good idea, but it’s not always the best option. In fact, for some, it could be a bad idea. So before you commit to a reverse mortgage, you’ll want to get some information and consider alternatives so you can choose the best path for you as you enter retirement.
Reasons Why a Reverse Mortgage Could Be Bad Idea
Getting a reverse mortgage can have its pros and cons, but at a fundamental level, don’t forget it’s essentially a loan against the value of your house. And like all loans, it must get repaid. Although there are many situations where a reverse mortgage is the right decision, before you make the decision to get one, consider these reasons why you may want to think twice before taking out a reverse mortgage.
1. You don’t live alone
When you share your home with someone who is not on your mortgage (a child, friend, or family member), there are three important aspects to consider. First, if the other person living with you is under the age of 62, they cannot also be a borrower on any reverse mortgage you apply for. Second, the other person holds no right to live in the home without the borrower. Third, payments on the reverse mortgage are only deferred as long as the borrower lives in the home as their primary residence. So if you are the borrower and you move, sell, or pass away, the loan and its balance head into repayment. If a reverse mortgage does go into repayment, and repayment is not financially possible, the lender will put the home into foreclosure, and this could mean your loved one loses his or her place to live.
2. You plan to travel
Do you plan to travel in retirement? If you are out to see the world for more than 12 months, whether it be by plane, train, or automobile, it can be seen as moving out of your home. Primary residency in the home is vital to maintaining a reverse mortgage. Lenders require you to certify annually that you still reside in the home the reverse mortgage is borrowing from. If you don’t, a lender may move for a reverse mortgage’s balance to go from deferred to being owed.
3. Health challenges
Not residing in your home for 12 months or more also applies to your health. If you are thinking of getting a reverse mortgage because of medical bills, take a look at the alternative ideas below first. Why? If your health is on the decline, you may need the support of assisted living or long-term nursing home. In either case, your home will no longer be considered your primary home, and because of this, you may find the lender asking you to pay back your loan.
3 More Reasons to Avoid a Reverse Mortgage
1. High Fees
Lenders assume certain risks with reverse mortgages, and one of the ways they cover this risk is by charging higher fees for the origination of your loan.
2. High Interest Rates
Another way lenders mitigate their risk is by charging higher interest rates on reverse mortgages.
3. Other Costs
There are many costs you’ll still be responsible for, including property taxes, insurance, and maintenance. Some people may find these costs difficult to maintain, despite the money coming in from the reverse mortgage.
Other Options Instead of a Reverse Mortgage
There are many alternatives to a reverse mortgage. Here are five to consider.
1. Get a roommate
Put your other rooms to use. Getting a roommate that pays rent can help alieviate financial stress and may be just what you need to avoid taking out a loan.
Sell your home and use your equity to fund your retirement dreams. We understand downsizing your home may be difficult, but it could be what you need to do to avoid taking on more debt. Also think about it, if you get a smaller home that is less up keep you will need to do, giving you more time to actually enjoy retirement.
Take advantage of low refinance rates when you refinance. Interest rates are at historical lows, so if you still have a mortgage on your house you may be able to refinance it to decrease your monthly payments. This may be just what you need to remedy your cash flow issues in retirement. Also consider a cash out refinance deal where you can take some equity out of your home which could also alleviate some financial stress during retirement. Usually refinancing is cheaper than a reverse mortgage.
4. Home equity loan
Are you needing a lump sum? A home equity loan could help. If you are already taking advantage of a low interest rate on your home but still need a lump some of cash, consider taking out a home equity loan. Home equity loan rates are extremely low because the loan is secured by your home, but be careful if you don’t make payments on this loan you could end up in a sticky situation down the road.
5. Home equity line of credit
Like a home equity loan, a HELOC offers an alternative to taking out a reverse mortgage. Think of a HELOC like a credit card, it is a revolving line of credit tied to your homes equity. This will allow you to take the money as you need it, without having to pay interest on money you are not using.