While the leisure time of retirement is a huge perk to look forward to, the excitement may be somewhat mitigated by concern over starting to live off of a fixed income. Many seniors find themselves looking to supplement their fixed incomes and a reverse mortgage can be a perfect solution. By this stage in life, most people have almost completely if not completely paid off their mortgages and when you own your home outright, or almost own your home outright, accessing that home equity can be a useful tool for increasing cash flow.
A reverse mortgage is a financial tool, a mortgage loan for homeowners who are at least 62 years old. This loan allows borrowers to remain in the home without a monthly mortgage payment, as payment is deferred until a borrower permanently leaves the home. The unique opportunity to live in your home combined with the ability to access equity without a required monthly mortgage payment is an optimal arrangement for many. Like any financial product however, it has its pros and cons. Take a look at the summary of pros and cons below and consider speaking to your family financial adviser about whether this might be the right decision for you.
Pros of a reverse mortgage
Pros include that the lender does not take ownership of your home as long as all loan terms are met, so you’ll get to continue living in your house. The funds can be used any way you wish, like to supplement your daily cash flow. In other words, the money is totally discretionary, and not ear marked for any specific use like debt repayment. The reverse mortgage is insurable and is what’s called “non-recourse,” meaning that the home is the only asset that can be taken to repay the loan, if need be.
Cons of a reverse mortgage
While being able to continue living in your home is a major pro, a potential con is that you may not live away from home for more than 12 consecutive months and the home on which you took the reverse mortgage must be your primary residence. For seniors who are used to living somewhere warmer in winter months, this may be a deal breaker. Other possible cons include that if heirs wish to inherit the home instead of selling it, they must find another way to repay the lender, such as refinancing into a traditional mortgage. And if you fail to pay property taxes, homeowners insurance and basic home repairs and maintenance the loan may come sure before you had originally planned.
All in all, a reverse mortgage is a viable financial tool that benefits many retired seniors every year. For those choosing to age in their own homes, taking advantage of this extra source of income is very useful, especially when considering taking on the extra expense of homecare aid. If you are at all concerned about where to live after retirement, how to afford retirement, and especially if you may need or homecare assistance, consider the pros and cons of reverse mortgages covered here, and consult with your own financial adviser, adult children, or whomever else you may want to weigh in on the decision. Knowing all the resources available can certainly make easing into retirement a smoother, more comfortable transition.