Reverse Mortgages in Retirement: When to Sign On and When to Steer Clear
With rising taxes, Medicare costs, and interest rates, retirement doesn’t come cheap. More than 1 million reverse mortgages, or Home Equity Conversion Mortgages, have been sold since 1990. But before you decide to fund your retirement via a reverse mortgage, it’s worth weighing the benefits against the risks for your situation, plus exploring alternative ways to fund your retirement dreams.
When to Apply for a Reverse Mortgage
1. You Want to Grow Your Retirement Savings
Since reverse mortgages offer fast cash, you can add that money to your retirement savings. The extra cash allows you to diversify your portfolio and grow your future funds.
2. You Can Cover Closing Fees
As with traditional mortgages, reverse mortgages have their own closing costs. According to American Advisor Group, fees include:
- Credit Report: $20–$50
- Flood Certification: $20–$30
- Escrow Fee: $150–$800
- Document Prep: $75–$150
- Recording: $50–$500
- Courier: $50
- Title Insurance: Varies by loan amount and region
- Pest Inspection: $100
- Survey: $100–$250
You’ll also pay an initial mortgage insurance premium fee equal to 2% of your home’s value, plus a loan origination fee charged by your lender starting at 2% of the loan with a maximum of $6,000. It’s possible to roll many of these costs into the reverse mortgage itself, but a home appraisal—$400–$600—must be paid upfront.
3. Your Home Isn’t Part of Your Inheritance
With a reverse mortgage, you can effectively deed your home to the lender after you die. The upside is your beneficiaries won’t be on the hook for the remainder of your loan. This also prevents foreclosure on your home after your death as the lender—not your heirs—becomes owner.
When to Steer Clear of a Reverse Mortgage
1. You Want to Keep Your Home in the Family
If passing your home on to your heirs is a high priority, reverse mortgages come at a high cost. The lender will expect payment in full after your death, which means your beneficiaries inherit your home and its debt.
Selling the home is an option, says Smartasset. If your property’s value exceeds the loan amount, your beneficiaries keep whatever is left over.
2. You May Need to Leave Your Home
Reverse mortgages are not forgiving if unexpected health issues arise. That means if you need to move into a nursing home or assisted living facility, the loan will need to be paid upfront. (A leave of absence longer than 12 consecutive months is considered a permanent move by law.)
It’s difficult to plan for future illness. Take the time now to ask yourself the tough questions about if or when you’d need to leave your home.
3. You Can’t Keep Up with Home Payments
Reverse mortgages have no monthly payments, but they do require homeowners keep up with other related costs. These range from home maintenance, property tax, and insurance. Unfortunately, more and more seniors are facing foreclosure from reverse mortgages because they fell behind or failed to meet other requirements.
Alternative Retirement Funding Options
1. Personal Loans
Personal loans are beneficial for paying down debt in a number of ways. Not only will your credit score rise from lowering your debt but you can apply for a lower-rate reverse mortgage later if it’s a fit to fund your retirement.
2. Equity Investments
Home Equity Investing is exactly what it sounds like. Homeowners tap into their home’s equity in exchange for a share of the property’s future appreciation or depreciation.
A Hometap Investment is an equity investment that allows you to fund your retirement and stay in your home—without any monthly payments or interest.
Plus, you can comfortably leave your home to your loved ones without fear of foreclosure or a mountain of debt to pay off.
Take our 5-minute quiz to see if a home equity investment is a good fit for you.
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The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.