Reverse mortgages aren’t cheap for seniors and should be avoided particularly for short-term needs, but recent research has identified an effective use of the product concept for those who have investments during volatile periods of market activity. This is according to Liz Weston, a certified financial planner and finance expert at NerdWallet.
“Stay-at-home orders may have taken away jobs needed to make ends meet, while low interest rates and a volatile stock market have endangered income from retirement savings,” Weston writes. “A reverse mortgage could be exactly the right tool at the right time. Or it could be an expensive mistake. It’s important to understand exactly how these loans work and to explore alternatives before you commit.”
While most of the upfront costs are taken out of a loan’s proceeds as opposed to coming out of a senior’s pocket, but the requirement of a 2% upfront mortgage insurance payment, plus an additional 0.5% annual charge along with origination costs and lenders’ fees make reverse mortgages an expensive way to borrow, Weston contends.
“Many borrowers don’t realize this, or that the debt can grow to the point where they may not have anything left to borrow against in an emergency or to leave to their kids,” Weston says, attributing that assertion to Barbara Jones, senior attorney for the AARP Foundation.
Low income seniors should also look into other options for financial relief, with many not realizing that they likely qualify for the earned income tax credit and forbearance options on their existing mortgage. However, that doesn’t mean that reverse mortgages are valueless in her eyes, she says.
“Although financial planners long considered reverse mortgages to be a last resort for struggling seniors, researchers in recent years found a potential use for more affluent people: as a relief valve to take the pressure off investments in bad markets,” Weston writes. “Tapping a reverse line of credit for income instead of selling beaten-down stocks gives investment portfolios a chance to recover along with the market.”
This, she says, is based on research conducted by Wade Pfau, professor of retirement income at the American College of Financial Services.
“A reverse mortgage also can provide monthly guaranteed income that isn’t dependent on stock market swings or a healthy labor market,” Weston writes, citing VP of retirement strategies at Finance of America Reverse (FAR) Stephen Resch in describing this potential use. However, an income annuity can often be used for similar purposes, she says.