If you’re in your 60s and own your home, chances are you’ve heard about reverse mortgages—or will soon.
A reverse mortgage is a type of loan that allows homeowners ages 62 and older, typically who’ve paid off their mortgage, to borrow part of their home’s equity as tax-free income. But they have risks and can be costly. Here are five reverse mortgage tips to consider:
1. Weigh all your options.
Whether you need money to pay bills or just want some extra cash, a reverse mortgage should be a last resort. Other options include selling your house and downsizing, or renting while carefully investing the sale proceeds. You could also take out a home equity loan or line of credit. If credit cards are the problem, consider consolidating that debt. If paying real estate taxes or home maintenance costs is the problem, look into local government assistance programs that can help. But, you have many options. So ask your state agency on aging about less risky, lower-cost ways to address your needs.
2. Understand the risks, costs, and fees.
Even though you won’t be making any interest payments as long as you live in your home, the interest rate matters. If you decide to move, you’ll have to pay back the reverse mortgage plus compounded interest. The same is true if you have to leave your home for more than 12 months. Ask about all costs and fees, including any prepayment penalties.
3. Recognize the full impact of your decision.
While you typically don’t have to pay taxes on the proceeds of a reverse mortgage, the income or lump sum you receive could affect your eligibility—or your spouse’s eligibility—for various state and federal benefits, including Medicaid. Depending on the state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if you have a health emergency and need to enter a nursing home that you can only pay for by liquidating assets. Finally, consider that a reverse mortgage is generally not the right choice for those who want to leave their homes to their heirs.
4. Get independent advice about reverse mortgage tips.
Reverse mortgages are complicated transactions. The federal government requires borrowers to meet with HUD-approved counselors before getting a federally guaranteed loan. Confirm that any counselor recommended by your lender is truly independent. You can do this by asking whether he or she receives any funding from the lender or the mortgage industry.
While most loans are federally guaranteed, lenders also offer proprietary loans that are not. Even if you’re applying for a proprietary loan, it’s a good idea to get advice from a trusted financial adviser who has no interest in either the reverse mortgage or any investment you plan to make with the proceeds. In any event, before you agree to a reverse mortgage, consult with legal and tax professionals who know the consequences of reverse mortgages for residents of your state and who aren’t connected in any other way to the transaction or the lender.
5. Be skeptical of reverse mortgages as part of an investment strategy.
Be very skeptical if someone urges you to get a reverse mortgage to make an investment or purchase an insurance product or security—particularly if they are promising high returns. In essence, they’re encouraging you to speculate with your home equity. You may need it for more critical purposes down the road. If you can’t afford to get a low return or the loss of your home, you shouldn’t be investing with your home equity funds.
By Gerri Walsh