The average monthly Social Security check is only $1,701.62 as of June 2023, causing many seniors to struggle to find ways to survive in the face of rising living costs. Some seniors, in an attempt to boost their income and stay in their homes, turn to tapping the equity they've accrued in those homes through a special form of financing called the reverse mortgage.
Reverse mortgages can be a viable tool for seniors. However, if they are not understood well, these loans can work against you.
That is why you should find a local [OA1] advisor who can provide personalized guidance and a deeper understanding of the process. Go online and type in 'qualified reverse mortgage specialist near me' and reach out for assistance, whether you have questions about the application process, documentation, or any other concerns.
But before you do that, you need to have at least a basic understanding of what reverse mortgages are and whether they may be the right option for your needs.
What Is a Reverse Mortgage?
Reverse mortgages may be a viable financial option for people over the age of 62 because they allow you to convert your home equity into cash, credit, or monthly payments from reverse mortgage lenders. Unlike traditional mortgages, where you have to make monthly payments, reverse mortgages pay you. It can provide an extra source of income for retirement.
The lender cannot cancel the loan unless the homeowner moves, sells their home, or dies. The loan is usually transferred to the heirs of the deceased and can be repaid through the sale of their home.
Assess Your Financial Needs
Before making your decision about whether a reverse mortgage is right for you, take an honest assessment of your financial circumstances. Are you having difficulty meeting daily expenses, facing increasing medical bills that require treatment, or looking to improve your quality of life in retirement? A reverse mortgage may offer lifeline relief. However, if short-term financial worries need immediate solutions, other approaches should be explored before committing to one.
Consider Your Long-Term Plans
Retirement years provide the chance to reap the fruits of your labor and achieve your lifelong ambitions, yet they also come with uncertainty and a need for planning. Before signing any paperwork related to a reverse mortgage, consider your long-term plans. Do you intend on staying in your current home for an indefinite timeframe, or would moving closer to family or a more manageable living arrangement be best? Your decision should align with your housing goals.
Benefits of a Reverse Mortgage
Reverse mortgages provide many advantages that can enhance the financial well-being and quality of life of seniors during their retirement years. One such advantage is being able to supplement retirement income without monthly mortgage payments weighing down monthly retirement budgets. This can ease stress while making funds available for medical bills, home repairs, travel, leisure activities, or any number of essential expenses.
Moreover, reverse mortgages provide the option to stay in your cherished home while accessing its equity, giving many a sense of familiarity, comfort, and independence. The flexible payment methods, including lump-sum disbursement, monthly payments, or a line of credit, allow seniors to tailor the loan to their unique needs and preferences. Unlike traditional mortgages, the eligibility criteria primarily focus on age and home equity, making it a more accessible solution for individuals with limited income or credit challenges.
Additionally, loan proceeds from reverse mortgages are usually tax-free, ensuring they retain their full value and potentially serving as a financial cushion in case unexpected expenses or economic uncertainties arise. Ultimately, these reverse mortgage funds can help [OA2] seniors enjoy retirement by unlocking the equity stored in homes, possibly opening doors to greater financial independence and opportunities.
Reverse Mortgage Cons
You Must Pay for It
Although a reverse mortgage can bring financial relief, it's essential to fully comprehend its associated costs. These may include origination fees, closing costs, mortgage insurance premiums, and interest rates. All of these costs can add up over time and decrease how much equity you're able to access. Therefore, it is wise to compare potential costs against potential benefits when making this decision
You Can't Deduct the Interest From Your Taxes Until the Loan Is Paid Off
Although you may have taken advantage of mortgage interest deductions when paying off your mortgage, reverse mortgage interest cannot be deducted every year. This benefit only becomes available once it has been repaid in full.
Reverse mortgages tend to be more costly than traditional loans because they are rising-debt loans. The interest is added to the principal loan balance each month. So, the total amount of interest owed increases significantly with time as the interest compounds.[OA3]
Moreover, a reverse mortgage can cause you to exceed the asset limits for Medicaid and Supplemental Security Income (SSI). It could affect your eligibility to receive these benefits.
You Can Lose Your Home to Foreclosure
Foreclosure might appear impossible because reverse mortgages do not require monthly payments of principal and interest. But this isn't true. Because homeowners retain the title for their home, foreclosure can happen if you fail to pay your property taxes, homeowner's insurance premiums, and/or HOA dues on time. You are also responsible for maintenance and other potential housing expenses.
Reverse mortgages also use up all or some of the equity in a home. That leaves fewer assets for the homeowner and his or her heirs.
Reverse mortgages are a financial tool that should be given careful thought. They may offer seniors much-needed flexibility during retirement but can come with their own set of complications and drawbacks.
By carefully considering your financial needs, understanding costs, consulting professionals, and considering emotional impacts before making your decision on this type of financing option, you can make an informed choice about whether a reverse mortgage is indeed suitable for you. Remember, your golden years should be a time of fulfillment, and your financial decisions should support that vision.
*Reverse Mortgage loans are based on several factors including age of the borrower which is a minimum of 62 year old, interest rates and the home's value. Eligibility consists of ownership of the home, residency of the home, the home's type and the age of the residence. There may be fees and charges that are applicable including loan fees and yearly contract charges. Several conditions for loan repayment may begin upon borrower's death, selling of the residence, or if the borrower leaves the residence. Interest on the loan payouts may be partially taxable. Kestra Investment Services, LLC and Kestra Advisory Services, LLC do not provide legal or tax advice. Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax and legal counsel.[OA4]
[OA1]Use of "expert" is deemed by regulators as difficult to substantiate expertise in comparison to other advisors. This is especially true when discussing a highly scrutinized strategy/product
[OA2]Promise of 'peace of mind' and 'security' are seen as overly promissory/unable to be substantiated/potentially materially misleading by regulators
[OA3]The rising-debt feature, along with those added to the following paragraphs, are necessary per Kestra policy to discuss. All materially relevant information must be presented.
[OA4]Kestra-mandated disclosure for reverse mortgages