A reverse mortgage can prove to be tricky if we do not have a good grasp of what it is and how it works. It has been touted in advertisements, and we may know some people who have used this tool. But what is it, really?

Today, with the help of investing and financial expert Pam Krueger and financial and fiduciary adviser Josh Escalante Troesh, we are going to discuss reverse mortgages, the unexpected risks involved, and what you can do to avoid these risks.

What Is a Reverse Mortgage?

Some older, healthier retirees prefer to maintain their current lifestyle. In doing so, they need more cash flow during their retirement. In many cases, these retirees also have their own homes and would want to stay in them.

Reverse mortgage, as the name suggests, is reversing the mortgage. Simply put, the house is seen as a source of income.

But before you get sold on the idea of taking out a reverse mortgage, it’s best to have a good understanding of how it works and the risks involved.

Who Are the Ideal Candidates for a Reverse Mortgage?

There are two basic categories that you should consider:

Requirements

Do you qualify for a reverse mortgage? If you are 62 years old and above, have a lot of equity on your house, and are financially capable of maintaining the house, then you might qualify for a reverse mortgage.

Life events

Are you anticipating any significant life events where taking a reverse mortgage might make sense?

The Unexpected Risks of Reverse Mortgages

There are two unexpected risks that you should look out for.

The first risk would be misleading sales practices that might lead to misinformation. The problem with this is you are being offered this tool, but you may not be qualified for it or a reverse mortgage may not be applicable to your situation.

A lack of proper understanding about how a remote mortgage works is also risky business. Questions abound: Does the tool match your lifestyle? How about your equity on the house? How will you be able to access the money?

It would be dangerous to think that a reverse mortgage will go on for the rest of your life, when in fact, it only typically runs for a certain term, perhaps 10 or 15 years. You have to take into account what your financial decisions would be once the reverse mortgage term has ended.

Furthermore, there is one added risk – if only one party has signed on the reverse mortgage and if you, the spouse, are not a co-borrower, when the signatory dies, you as the surviving spouse would have to go through an application process and file a request so that you will not be evicted from your house.

Planning for Your Future

If you’re armed with adequate knowledge on the matter, these risks can be mitigated and even avoided. Proper explanation from a trusted and unbiased resource can help you determine whether or not a reverse mortgage is ideal for you.

It is important to remember that a reverse mortgage is a tool and that it has its limitations. As with any financial decision that you would make, you need to plan for it and have open conversations with your family about it.

What are your thoughts on reverse mortgages? Would you consider taking out a reverse mortgage? Leave a comment below!