A Reverse Mortgage Offers a Silver Lining for Older Homeowners
When individuals take out a reverse mortgage, they will receive cash from the lender that represents an advance payment on the equity in the home. Reverse mortgages offer a silver lining for older homeowners.
According to USA Today, Eileen Redden, 63, was looking for another source of income and after getting a reverse mortgage, “she’s breathing easier with a reverse line of credit that allows her to pull money from her house as she needs it being able to stay in the home she loves while tapping its equity for a financial cushion was a win-win, Redden says.”
“The key to deciding if a reverse mortgage is right for you is finding the right company to work with,” said Redden, “My loan officer took the time to listen to my financial goals, and there was no pressure or sales pitch.”
A reverse mortgage can help older homeowners tap into their home equity for a line of credit to pay for living expenses. According to Fortune, “When the homeowner dies, moves or sells the house, the balance of the outstanding loan is due to the bank. Reverse mortgages have a slightly tainted reputation in the retirement-savings world, for various reasons: Financial planners often think of them as a last resort for people with no other resources; origination fees can be high; and high-profile fraud cases involving lenders in the 1990s and 2000s made consumers justifiably skittish about them. As a result, since 1990, only about 1 million HECMs have been issued, according to the Department of Housing and Urban Development, with almost half of those originating between 2007 and 2011, when the financial crisis hammered Americans’ retirement savings.”
Keep in mind that a reverse mortgage isn’t simply free money because borrowers will have to repay the loan either when the home is sold or if they no longer live in it. However, surviving heirs do not have to repay the loan after the borrower’s passing.
According to Chad Nicholson, a mortgage broker with American Financing in Aurora, Colo., this makes a reverse mortgage a much safer option than a home equity line of credit or a personal loan, because both generally come with higher interest rates and severe penalties if a payment is missed.
“In retirement, it’s all about having cash flow flexibility and living a simpler way of life,” Nicholson says.
Jack Guttentag, who goes by The Mortgage Professor on his website, advises that individuals should take out a reverse mortgage as soon as they are eligible (62) and that they should try not to use it for as long as they can. In fifteen or twenty years they can convert the HECM credit line into a tenure payment. He believes that the compounded interest will lead to a much larger payment than they would have gotten by putting the money into an annuity. Guttentag laid out some hypothetical scenarios in the chart below: