“You can’t take it with you when you go.”
That’s pretty much the driving principle behind reverse mortgages. You get cash now. You get to stay in your home. By the time the bank takes it back you’re (probably, hopefully) dead.
As a result, many people look at a reverse mortgage and see “free money.” But unfortunately, there are plenty of pitfalls that make reverse mortgages a very risky move.
How does a reverse mortgage actually work?
A reverse mortgage is essentially a home equity loan, which means you are taking on debt. However, there are some key differences between a reverse mortgage and a traditional home equity loan.
- With a normal home equity loan you would receive a large, lump sum payment. When you take out a reverse mortgage the bank disburses a small percentage of the loan each month, essentially supplementing your monthly income.
- You won’t make monthly payments, but the balance comes due after you die, sell the home or move out. The bank will have the right to sell your home.
- There are requirements. Borrowers must be 62 or older.
- Most borrowers own their homes outright. Some have a very large equity percentage and a very small mortgage.
- Fees can be outrageous, ensuring that you owe more than you’re ever going to get.
How can borrowers use this money?
There are no restrictions. Many borrowers use the money to supplement their retirement incomes.
How much money can you get?
It depends. Older borrowers with more valuable homes will tend to get more money.
But that’s probably not what you should be focused on. If you get dollar signs in your eyes you might not evaluate the pitfalls properly.
Pitfall #1: It will be extremely difficult for your heirs to keep the home.
This may or may not be an issue for you. If you don’t have heirs or you feel that your heirs would find your home to be a burden then you can effectively dismiss this concern.
But for many families, the home is the only wealth they’ll ever be passing on. And while heirs could keep the home by paying the balance of the reverse mortgage, they may not have funds to do so.
Pitfall #2: Foreclosure still happens.
You may think you’re safe from foreclosure because the bank is supposed to be paying you. But if you fall behind on your property taxes or homeowners insurance then you could still be forced out of your home.
Many borrowers do not understand this, prompting lawmakers in some states to seek more protections for reverse mortgage borrowers.
Pitfall #3: You’re essentially trapped in the house.
Need to move to a nursing home? Want to move in with your kids?
The reverse mortgage may hold you back or leave you broke. The bank will sell the house, and if it sells for less than you owe then you’ll have to pay the difference. Many homeowners won’t be able to afford this, which means they’ll be trapped in their homes well past the point when they should be seeking an alternative arrangement.
Pitfall #4: Anyone else who lives in the house could be in trouble after you die.
According to The Motley Fool:
“Until recently, even the spouse of the person whose name was on the reverse mortgage could be required to leave the home. New legal provisions now protect spouses in that situation, but if you have children or other family members other than your spouse living with you and their names aren’t on the Reverse Mortgage they could be forced out of the home within 12 months.”
Make sure you discuss this possibility with your family before you move forward.
You do have alternatives.
It’s entirely possible you just can’t afford to stay in your home and that sending it on to your heirs is either not feasible or not a concern. There is a way that you can get extra money to supplement your retirement while allowing anyone else who lives in your home to vacate in an orderly way.
Selling the home as-is may be the best way to keep a safe roof over your head, allowing you to downsize into assisted living, a more modest condo, move in with your kids or to get an apartment. The lump sum that remains could then be added to your retirement fund or bank account. You can disburse the money to yourself on a monthly basis if you need to. This financial move is much less risky than opening the door for a bank who will almost certainly structure the deal so that they, not you, come out on top.
Cash is better than debt. Call Big State Home Buyers to find out how much your home could be worth.