As a complex financial instrument, a reverse mortgage has the potential to help retirees which are in specific financial circumstances, but should be fully understood in context with features, potential shortcomings and comparison with available alternatives. This is according to a reverse mortgage guide published this month by Bankrate.
Seniors at or over the age of 62 who qualify for a reverse mortgage can eliminate their monthly traditional mortgage payment without having to sell the property, and can continue to live in the home as long as they live there. It can also help seniors avoid potentially more costly alternatives according to Bruce McClary, VP of marketing at the National Foundation for Credit Counseling (NFCC).
“In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans,” McClary tells Bankrate.
However, consumers need to be aware of the upfront costs which often include mortgage insurance premiums (MIP), an origination fee, servicing fees and third-party fees. However, many lenders present the option to roll these fees into the loan itself, Bankrate notes.
“The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you don’t have to shell out the money upfront,” the article reads. “Doing this, however, reduces the amount of funds available to you through the loan.”
In detailing the pros and cons to consider before applying for a reverse mortgage, the pros include the elimination of a monthly mortgage payment; the ability to apply loan proceeds toward living and healthcare expenses, or to pay other bills; the ability for non-borrowing spouses to remain in the home after the primary borrower dies; and that loan proceeds have the potential to stop a foreclosure if they use the proceeds to pay off an existing mortgage, the article says.
In terms of the cons, a borrower must maintain the home and continue paying property taxes and homeowners’ insurance; and associated fees and closing costs can be high when compared with other loan products, the article says. It also adds that borrowing against home equity may not be the best solution for everyone.
“A reverse mortgage forces you to borrow against the equity in your home, which could be a key source of retirement funds,” the article reads.
Those who are not convinced about the idea of taking out a reverse mortgage are not without alternative options, which can include a mortgage refinance transaction; downsizing into a smaller home; or trimming other discretionary spending to limit the amount of outgoing cash.
Read the article at Bankrate.