It’s no secret that many Americans are financially unprepared for retirement. But a recent The Motley Fool article suggests that reverse mortgages can be an important fund-generating tool for many retirees.
“What’s so great about a reverse mortgage? Well, it can give you a bundle of money to live on in retirement,” writes Selena Maranjian.
However, there are many details potential borrowers must understand to determine whether a reverse mortgage is right for them.
Maranjian describes how one becomes eligible for a reverse mortgage, including being 62 or older, and notes that there are three main kinds of reverse mortgages. The vast majority are federally-insured home equity conversion mortgages (HECMs) and other kinds are proprietary reverse mortgages.
“Drawbacks” to consider include closing costs, which tend to be higher than regular mortgages, she says.
“For HECM loans, for example, origination fees are generally 2% of the value of the loan,” she says. “The applicable interest rates tend to be higher as well, in part because a mortgage insurance charge (generally between 0.5% and 2.5%) is added to the rate.”
In addition, receiving income from a reverse mortgage may also impact the borrower’s eligibility for various benefits, such as Medicaid and Supplemental Security Income.
“A major potential downside is that a reverse mortgage will shrink the value of your estate, meaning that you’ll have less wealth to pass on to your loved ones,” she says, noting that for those who have children in good financial shape this might not be as much of a concern.
“Reverse mortgages aren’t right for many people, but they do serve some people well,” she says. “Before getting one, take time to learn more about them, explore all your options, and consult with a financial advisor or two.”
Read the article here.
Written by Cassandra Dowell