Part one of this four part series explained the complexities of a reverse mortgage. Parts two and three gave the advantages and disadvantages respectively. And now, in part four, we arrive at the crux of the reverse mortgage issue: is it for you?
First, however, let’s review the definition and essential facts:
A reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, the borrower builds equity in his house by paying down a loan taken against the house. With a reverse mortgage, the borrower gives up home equity in exchange for payments from the lender.
- The home owner must be at least 62 years old to qualify for a reverse mortgage.
- The home must have substantial equity.
- Credit scores are irrelevant.
- Any previous mortgage will be paid off by the reverse mortgage.
- You can receive your payments by lump sum, monthly payments, line of credit or any combination.
- The borrower retains the title on the house, meaning that he is responsible for all taxes, insurance and maintenance
Now: is a reverse mortgage for you? If you are seriously considering one, I assume the following:
- You have a cash flow problem.
- Staying in your own home is very important to you.
- Leaving an inheritance is not important to you.
- You clearly understand how a reverse mortgage works.
- You have read parts one, two and three of this series.
Are you ready to pull the trigger? Slow down. The reverse mortgage may be a good choice for you, but because this is a decision that is nearly irreversible, make sure you clear the following hoops:
Make a budget.
You wouldn’t be considering a reverse mortgage if you didn’t have a cash flow problem, but it is possible that living on a written budget could solve that problem. Furthermore, if you aren’t great at managing money, the added income from the reverse mortgage could dissolve. Put the reverse mortgage on hold, work out a written budget and live on it for three months before considering the reverse mortgage again. Most people find money when they manage it. At best, you might resolve your cash flow problem without needing the reverse mortgage. At worst, you will be in a better position to manage the new income from your reverse mortgage.
Make sure you are not planning to move.
Once you sign up for the reverse mortgage loan, your home equity drops immediately because of closing costs. Because you are not repaying these closing costs, interest will be compounded against these charges as long as you are in the house. Moving normally is not a viable option once the reverse mortgage starts.
Consider waiting anyway.
The older you are when you start the reverse mortgage loan, the greater the percentage of your home equity you will be able to tap. If waiting is an option, strongly consider it. Signing up prematurely will cost you.
Examine other options.
I realize that staying in your home is important to you, but you should nevertheless compare the reverse mortgage loan to selling your home now and purchasing something smaller or more efficient. This option would utilize 100% of your current equity (compared with a 30%-60% in a reverse mortgage loan) and would leave you with 100% equity after you relocate.
Make sure you know:
- How much cash you can get by selling your current house.
- How much you would pay for a smaller home.
- How much money you could earn on the nest egg that remains after you have downsized.
- Another option: consider renting and living off the proceeds of the sale of your house.
If you are considering a reverse mortgage, make sure you look before you leap. Why? Because the equity you are giving up makes the decision fundamentally irreversible. It is a BIG decision.
Therefore, be sure to check all alternatives first. Living on a budget, for example, might give you the cash flow you are looking for. Even if living out your life in your current home is a high priority to you, go ahead and run some numbers to learn how much you could reasonably net if you sell and repurchase a smaller home. The possibility of owning a smaller home and having $50,000 or $100,000 cash in the bank might influence your decision.
A reverse mortgage may be your best option, but only after you have ruled out every alternative.
I hope these thoughts help you with your decision. If you have further questions, please enter them in the comment box below and I will do my best to get you some answers.
Learn More About Reverse Mortgages – these links will help:
Have you or any of your family members had a reverse mortgage? Did you understand it? Any surprises? Would you recommend it to others?
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