A reverse mortgage can come with some benefits for an elderly couple seeking additional cash flow in retirement, but should also be considered alongside other options in relation to cost and the potential impact on personal finances before any final decision is made. This is according to a financial advice column published on Wednesday in the Washington Post.
The reader seeking advice described a scenario in which a reverse mortgage was placed on the proverbial “table” due to a material increase in their home value, which led to the idea of tapping that increased value.
“[I]t’s nice to know that the value of your home went up by $50,000. However, if you purchased your home and took out a huge loan to pay for it, a reverse mortgage won’t help much because you’ll only get a fraction of whatever equity is available,” writes columnists Ilyce Glink and Samuel J. Tamkin.
However if the homeowner paid cash, then more options are available to them including a home equity line of credit (HELOC), a cash-out refinance or a reverse mortgage, the pair says.
“Usually when you do a cash-out refinance, the lender will allow you to finance a certain amount of the value of the home depending on your income and repayment abilities,” they write. “We don’t know what you make, but it seems from your letter that it’s not much. If this is the case, a conventional lender would likely give you a small mortgage, and you’ll be obligated to repay it monthly. You might qualify for a home equity line of credit, but the amount would be small, and the interest rate is typically higher than a cash-out refinance.”
This is where a reverse mortgage benefit could be clearer depending on their situation, they continue.
“On the other hand, a reverse mortgage lender may give you more than 50% of the equity, depending on a range of factors, including where interest rates are at the time and how old you are,” the pair writes. “On that front, you need to be 62 years old or older to take advantage of a reverse mortgage; and in your letter you indicated you’re ‘around 60.’ You may not qualify because of age, and even if you are 62, you’ll get a lot less cash from your reverse mortgage than someone who is older because age is a determining factor.”
With a reverse mortgage a traditional, monthly mortgage payment is not required, however taxes and insurance will continue to need to be paid, the pair explains.
“As you consider these options, you should know that in either case, if you take out money from the equity in the home to pay for your current living expenses, you’ll end up spending the equity you have in the home now and won’t have that money down the line,” the pair says.
At the end of the day, each option available to the couple in question has some kind of associated cost, up to and including downsizing into a smaller home, or selling and renting a new place to live.
“If you qualify, a reverse mortgage means you won’t have any monthly payments and in fact won’t have to pay anything except real estate taxes and maintenance until the home is sold, whenever that is,” the pair writes.
Read the column at the Washington Post.