Financial independence is among the main concerns of retirees. Many of us worry about outliving our savings and seek options to maintain a steady income stream. Among the options commonly offered today are reverse mortgages.

However, reverse mortgages aren’t always a wise investment. Together with investment and financial experts Josh Escalante Troesh and Pam Krueger, Margaret Manning answers your reverse mortgage questions and helps you figure out whether it’s the ideal choice for you.

What Is a Reverse Mortgage?

A reverse mortgage is a loan arrangement where one can borrow from the equity in their home to create a cash flow during retirement. It is a financial solution for people who have a lot of equity in their home, or those who have very small mortgage or no mortgage left.

Both private companies and the government offer reverse mortgages. But Pam and Josh advise against proprietary reverse mortgages. If you do decide to get one, get HUD-approved reverse mortgages, which follow very specific rules and regulations.

How Does Reverse Mortgage Work?

In a reverse mortgage, a retiree borrows money, and all interests and fees accrue on the loan balance. There are no payments made until a defined time in the contract when you pay the entire loan.

Reverse Mortgage Is the Exact Opposite of a Mortgage

In a mortgage, you don’t own a home, borrow money from the bank, pay the bank with interest every month, and at the end, you become the owner of the home.

In a reverse mortgage, you own the home, get money from the bank every month, and at the end, pay the money back and don’t own a home.

Reverse Mortgage Is Not Like an Annuity

Some reverse mortgages work like an annuity in that you get paid a monthly income stream. However, unlike in an annuity that pays you monthly the rest of your life, there is an end to the income stream from a reverse mortgage. This would be the time when you’ve consumed all the equity in your house.

Reverse Mortgage Incurs Fees

Reverse mortgages incur origination fees, monthly servicing fees, and interest rates. Two insurance premiums need to be paid as well. The first one is half of 1% on the balance of the loan every single year. The other is 2% mortgage premium on the assessed value of the house, not on the loan value.

What Are the Risks and Limitations of a Reverse Mortgage?

Since a reverse mortgage is essentially a loan, it comes with risks and limitations:

  • The amount of loan from a reverse mortgage depends on the value of the house, but it is currently capped at $726,000. You will not get more than that amount regardless of how big your house is.
  • Whether you can get more money in case of an emergency depends on the contract.
  • A reverse mortgage is a non-recourse loan. You will not be asked to pay more than the value of your home. In case you are unable to re-pay the loan, you lose your home, but your other assets are kept safe.
  • If the sale of the house is not enough to cover the loan, the government steps in and makes the bank partially whole.
  • Protections in the regulations are tied to the borrower. So, it’s highly advisable for spouses to be co-borrowers for increased protection.

Who Are Ideal Candidates and Who Are Not?

A reverse mortgage is not a panacea for financial trouble. While you do get a huge amount from your house, it also entails risks and requires a more in-depth assessment of what could happen during and after the loan.

There are two profiles of ideal candidates for a reverse mortgage. The first is someone relatively financially stable and does not need the money for long-term living. The second is a person who has consulted with a fiduciary financial advisor to figure out whether they are qualified for it.

Reverse mortgages are not designed for people who are in financial straits. They are not viable options for people who lack understanding of everything else that is going on with their finances. These people tend to get trapped with unexpected expenses when they get a reverse mortgage.

A reverse mortgage impacts everyone in the family. Take time to discuss its pros and cons with your loved ones. Find a trustworthy fiduciary financial advisor who can give you sound advice.

Have you taken a reverse mortgage? Do you know someone who has greatly benefited from it? Or maybe someone who has suffered financially because of it? Share your experiences in the comments below!

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