Reverse mortgages may not be the easiest financial products to comprehend, or even the perfect solution for most seniors. But for some retirees, reverse mortgages can be a valuable resource if they understand the potential advantages as well as the risks of borrowing against their home equity, according to a recent CNBC article.
Housing wealth often represents a large portion of retirees’ net worth alongside any other investments they might have. But as the Federal Reserve stalls on raising interest rates, some retirees who rely on investment income may be feeling a strain on their finances as a result of this “go-slow” approach.
One silver living of this low rate environment, however, is that it’s easier for retirees to generate cash flow from reverse mortgages, writes CNBC personal finance contributor Kelley Holland, who suggests lower interest rates can translate into larger mortgage amounts compared to a higher rate environment—the difference in which can be meaningful for older Americans.
For example, at an interest rate of 5%, CNBC posits that a 65-year-old homeowner could take out a reverse mortgage of up to $270,000 on a home valued at $500,000. When rates rise to 7%, the maximum loan amount afforded to this same senior drops to $182,000, according to CNBC, which cites the Center for Retirement Research at Boston College (CRR).
“There are a large number of households entering retirement that are not going to gave sufficient resources to maintain a standard of living to pay medical bills,” said Steven Sass, program director at the CRR, in the CNBC article. “[If their] biggest source of savings is the equity in their homes, not their 401(k), and there is away to access that equity, that seems like a good thing to do.”
Before seniors move forward with plans to get a reverse mortgage, CNBC advises that they first consider the downsides and potential risks, including the progressive depletion of home equity over time, as well as the consequences of falling behind on property taxes and insurance payments.
“Reverse mortgages are not simple, and if homeowners don’t properly assess the risks, they can be dangerous,” CNBC writes. “Handled correctly, these loans can make a key difference in an older person’s quality of life.”
Read more at CNBC.
Written by Jason Oliva