Taking out a reverse mortgage typically was a last resort to provide cash flow for financially strapped individuals but recently Congress passed a new bill into law that opens the door for many other older Americans to take out a reverse mortgage. The question is however, whether this is a smart financial move or not.
What is a Reverse Mortgage?
In essence, reverse mortgages let homeowners who are at least 62 years old borrow against their home equity. The loans don’t have to be used for a specific purpose, but typically they are used for home modifications, repairs, medical expenses or home care that elderly people might not otherwise be able to afford. Many are now using the loan as a buffer to keep from selling investments at significant market declines. The decision isn’t one to be made quickly though. Fees can still be onerous and taking on debt to avoid selling investments isn’t always a smart financial move.
How Reverse Mortgages Work
A reverse mortgage loan is due, with interest, when homeowners move out, sell the home, die or fail to pay property taxes or homeowner’s insurance premiums. In the case of the homeowner passing away, the homeowner’s heirs typically sell the house, pay the balance of the loan and keep whatever is left.
In the past, reverse mortgages were a last resort because fees were high, sometimes as much as 5% of the loan amount. This changed a few years ago, when a new product was developed and insured by the Federal Housing Administration called the HECM Saver, which typically has lower upfront borrowing costs than earlier types of reverse mortgages.
Consult an Expert
Be sure to first review your situation with your financial advisor. They will be able to provide you with unbiased advice and guidance to help you determine what the best course of action is for you and your situation.
Additionally, before you begin talking to lenders, consider getting advice from a reverse-mortgage counselor certified by HUD to learn more about the options and mechanics. The National Council on Aging and other nonprofit groups sometimes offer such counseling, often at reduced rates.
There is a directory of reverse-mortgage counselors at hud.gov. Click on “Talk to a Housing Counselor” and then “Search online for a housing counseling agency near you.”