A growing number of seniors are taking out reverse mortgages to access cash they can use for anything — from a luxury retirement vacation to basic life expenses.
It’s an appealing way of getting extra money: You can take out cash without having a payment due until you stop living in your house, sell your house, fail to pay housing expenses like taxes and insurance or die.
Meaning there’s a real possibility that you can live out the retirement of your dreams with the value you have accrued in your home without owing repayment in your lifetime.
But this financing tool is not for everyone and it comes with serious risks.
For that reason, it’s crucial to speak with a financial advisor and a Department of Housing and Urban Development-certified counselor — which is a requirement of most reverse mortgages anyway. Additionally, consider your options when deciding whether to apply for one and ask yourself these five questions to determine whether a reverse mortgage is the right choice.
You can borrow against the equity accrued in your home with a reverse mortgage
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Is the home your primary residence?
All reverse mortgage borrowers are required to live in the home they’re taking out a loan against and do so for the majority of the year.
Here are some of the permanent residence guidelines for a reverse mortgage borrower, according to the Consumer Financial Protection Bureau (CFPB).
- You or a co-borrower must live in the home for more than half the year.
- If you are away from the house for more than two months at one time, you must write to the lender to tell them.
If that stops being the case for any reason — even if it’s to enter a long-term healthcare facility or hospital for longer than six months — the loan plus interest becomes due immediately.
This is one of the largest risks associated with the loan because if you get ill and need extended medical care, you may have to sell your home to repay the debt or provide the lender with a deed in lieu of foreclosure, according to the CFPB.
Are you certain you’ll be able to make necessary payments on time?
As part of a reverse mortgage term, you are required to make on-time property tax payments, insurance payments and any other costs related to your housing, like HOA fees.
You also need to make sure your home is maintained. If you fail to adhere to these conditions, your term will end and a massive payment will be due.
It’s essential that you know you have enough to make these payments for as long as you plan to hold onto the loan. You should also make a plan for how you will ensure payments will be made in case of an emergency.
Why do you want a reverse mortgage and what will you use the money for?
For the most part, experts recommend only tapping into your home equity if you are putting the money toward an investment.
For example, a renovation could increase your home’s value, making any money spent on it a good investment. Or you may want to pay off debt that has an interest rate higher than the reverse mortgage interest rate.
While you can spend the money you get from a reverse mortgage on whatever you want, most experts advise against using the cash to pay for a luxury vacation or go on a shopping spree.
Have you considered another home equity financing tool instead?
Reverse mortgages are riskier than other tools like home equity loans and home equity lines of credit because they require a balloon payment, or a lump sum at the end of the term.
They are also risky because if you fail to maintain upkeep on your home, pay your taxes and insurance on time or suddenly have to stop living in the house, you could be forced to pay or lose your home within months. Reverse mortgages can be appealing to those tapping into their equity to supplement a fixed income — because they don’t add an extra expense each month.
While home equity loans and HELOCs require monthly payments, you won’t have to pay it all in a lump sum, which makes it easier to manage if an emergency comes up or if you don’t have much money on hand. Plus, interest rates on home equity loans and HELOCs are typically lower than rates on reverse mortgages.
These are typically the better options for those with sufficient liquidity to make monthly loan payments.
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Have you spoken to your heirs?
Even if you take out a reverse mortgage for smart financial reasons, expect to live in the home your whole life and have a plan to make all necessary payments — a full balloon payment will come due when you die.
It will be on your heirs to deal with once you’re gone, so it’s a good idea to include them in the conversation — especially if you want to keep the home in your family or community.
They will probably be left with several options: settle the debt using money from your estate, refinance the debt using another home equity payment that they will have to pay off over time, sell the home or give the lender a deed in lieu of foreclosure.
Bringing them into the conversation will ensure you and your heirs are on the same page.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed financial decisions. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of home loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
