Who Should Consider a Reverse Mortgage?

According to the National Reverse Mortgage Lenders Association’s Reverse Mortgage Market Index report, seniors have approximately $3.19 trillion invested in their homes. Yet a poll conducted by the Associated Press and Life Goes Strong found that 89% of the 77 million “baby boomers” polled did not believe that they had saved enough for retirement. This disconnect leaves many retirees looking for ways to use their home equity to make up for their limited savings. In many cases, this is what leads seniors to reverse mortgages.

Reverse mortgages let homeowners borrow a portion of their home equity, as long as they are at least 62 years old and have a small remaining mortgage balance. Seniors are not required to repay their loan until they sell their home, pass away or stop using the home as their primary residence. At this time, seniors will repay the borrowed amount, plus interest and other fees. Because getting a reverse mortgage will eat into a senior’s home equity, these loans are not for everyone. They are mainly beneficial for people who fall into one of two different categories:

Seniors Who Want to Strengthen Their Financial Position But Have Limited Assets

Today, many retirees depend on their Social Security benefits to get through retirement. Unfortunately, for those who still owe money on their homes, these benefits might not be enough. One way to eliminate one’s mortgage payment is to repay the existing loan with the proceeds of a reverse mortgage. Depending on a borrower’s age, property value and amount of equity, he or she might even have proceeds left over after repaying the forward mortgage loan. Leftover proceeds can be delivered in one lump sum, in monthly payments or as a line of credit. This will further increase borrowers’ cash flow and make their retirement income go that much further.

Still, it is important to understand that a reverse mortgage will not eliminate all costs associated with home ownership. Even after getting a loan, borrowers are responsible for both their property taxes and homeowners insurance. Borrowers are also expected to maintain the condition of their home. Those who fail to meet these requirements may be asked to repay their loan early.

Seniors Who Have a Substantial Amount of Equity and No Future Plans for this Asset

While reverse mortgages are thought to provide the greatest benefit to house rich but cash poor seniors, retirees from all walks of life can take advantage of these loans. Many seniors take a reverse mortgage to renovate their home, fund family vacations or even help grandchildren pay for college.

It is true that reverse mortgages decrease the assets that can be passed on to one’s heirs. Still, unless heirs are depending on a large inheritance, many seniors would rather enjoy the extra cash while they can. It is also important to understand that getting a reverse mortgage will not make it impossible for children to inherit the family home. Reverse mortgages can be repaid by any means available. Heirs can repay the loan themselves or even decided to refinance the loan. Some seniors also purchase life insurance policies that cover the balance of their loan. This makes it possible to pass on the family home while still enjoying additional cash during retirement.