When completing a retirement analysis for our clients, we are sometimes faced with results that are below our level of comfort. In some cases, after open dialog, the adjustments agreed upon raise the chances of plan success thus leaving both parties happy with the projections. However, sometimes when adjustments are made to the plan, we still find ourselves in a situation of long-term uncertainty.
What comes from this is a further list of considerations to help strengthen the plan. Inevitably, the conversation is shifted to the primary residence and the question of a reverse mortgage is often brought to the table. In this post, we will discuss quick facts of what a reverse mortgage is and if it is even a viable option to consider.
What is a reverse mortgage?
Simply put, it is a loan offered to homeowners age 62 and older who have paid off (or are close to paying off) their mortgage and need access to income for retirement or to maintain a certain level of assets within their portfolio. The loan proceeds are either given up front in-full, paid out on a regular basis such as monthly, or a line of credit can be established. There are high initial costs attached to establishing a reverse mortgage and the amount received is based on your age, value of home, and current interest rates. Often times, these loans are and should be considered as a last resort.
Repayment is not required until certain events occur such as a sale of the home, death, or failing to pay property taxes. This means that the loan balance is generally left to grow as interest compounds on the unpaid debt, which essentially limits the increased amount of equity one would otherwise get from appreciation of the home by simply owning it outright. In cases where an individual dies, the surviving spouse may be left in a difficult financial situation if the loan is only in the name of the individual who passed away and immediate repayment is required.
Is it for everyone?
Because of the risks involved, absolutely not. While it is available to homeowners age 62 and older, it is a more viable option for those in their mid-70s or later. With long-term outlooks often changing, the younger an individual applies for a reverse mortgage, the higher the chances are they will be in an undesirable financial and/or emotional situation at some point in the future. If cash is needed at a younger retirement age, options such as a home equity line of credit (HELOC) or selling the home and moving to a less expensive one should also be considered.
Before making any decision, we highly recommend that you research further and seek the advice of your financial planner to see if a reverse mortgage is a practical option. By understanding all of the pros and cons attached to your situation, the right decision can be made thus alleviating the potential increased financial worry during retirement.
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