Reverse mortgages can be viable options for older Americans who are looking to borrow money for an abundance of reasons, and should be considered based on their own merits. Still, prospective borrowers should be aware of any potential cons that reverse mortgages may have, including high upfront costs and the critical necessity of being able to maintain the property.
This is according to personal finance columnist Michelle Singletary in a new piece at the Washington Post.
“There is a financial product that does allow seniors to borrow for retirement. If seniors have substantial equity in their homes, they can take out what is called a reverse mortgage,” she writes. “Reverse mortgage borrowers don’t pay back their loans until they move, sell or die. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.”
The reverse mortgage offers a way for seniors who have a lot of equity in their homes without a lot of liquid assets (those who are “house rich, cash poor”) to access further liquidity, allowing a path forward for those who require additional funds but who don’t want to sell or move away from their home.
Citing a recent study conducted by the Boston College Center for Retirement Research, reverse mortgages may be worth considering for older homeowners who need cash and have equity in their homes. However, other considerations should also be taken into account before a senior seriously considers engaging with a reverse mortgage.
“A Home Equity Conversion Mortgage (HECM) loan on a $300,000 house costs about $13,500 up front and 5% on amounts borrowed in January 2020, with the rate adjusted annually, according to the paper,” Singletary writes. “Given higher upfront cost, a reverse mortgage works best if you plan to stay in your home for a long time.”
Nevertheless, the study dictated that homeownership patterns largely are stable enough for seniors to tap into the equity they’ve built up in their homes.
“The researchers concluded that for many older homeowners — with the exception of people who frequently move — tapping home equity through a reverse mortgage could be a good financial strategy. In essence, they can borrow for retirement,” she writes.
However, seniors should be aware of other potential issues before going through with a reverse mortgage, including rules related to non-borrowing spouses (NBS), their ability to maintain the property they are borrowing against, and how adult children or other family members living in the home may be impacted if the loan becomes due.
Read the article at the Washington Post.