The Pros and Cons of Reverse Mortgages for Retirement
Wondering if applying for a reverse mortgage is the right option? Before you make a decision, read on for the pros and cons of reverse mortgages for retirement
Sudden unemployment or health complications may have forced you to move up your retirement planning before you’ve built substantial retirement savings. If you’re in need of cash to help in covering your basic expenses, increasing cash flow, or retirement income, then it might be beneficial to access your home’s equity with a reverse mortgage.
A reverse mortgage is a home equity loan alternative that offers quick cash for those who may be house rich cash poor. Yet, it isn’t the right plan for everyone. For some, the risks may outweigh the benefits.
Before you sign any dotted lines, consider the pros and cons of reverse mortgages for retirement to guarantee that it’s the best option for you.
What You Need to Know About Reverse Mortgages
A reverse mortgage is a type of loan that’s given to older homeowners who have considerable home equity. Essentially, homeowners can borrow against the equity of their home and receive funds as a lump sum, monthly payment, or line of credit. Additionally, homeowners are not required to make loan payments.
A loan in which someone pays you can certainly sound enticing. However, there are many factors to consider before committing to a reverse mortgage. Securing a reverse mortgage loan is a complicated process, and the number of funds you receive depends on a few factors:
- Your age – Only homeowners who are 62 years old or older qualify for a reverse mortgage.
- Your payment history – Although there is no minimum credit score required for a reverse mortgage, lenders will still assess whether or not you’ve paid your credit lines, insurance, taxes, and other fees on time to determine whether they’re willing to work with you. This means that getting a reverse mortgage with bad credit or late payments can be difficult.
- Your property’s market value – How much equity do you need for a reverse mortgage? To qualify for a reverse mortgage, you will need 50% equity based on your home’s current market value.
- Your preferences – A borrower can acquire three types of reverse mortgages: single purpose reverse mortgage, proprietary reverse mortgage, and home equity conversion mortgage (HECM loan). The type of reverse mortgage you acquire will depend on your finances, appraised home equity, and the purpose of acquiring a loan.
Pros & Cons of Using Reverse Mortgages for Retirement
Once you’ve assessed each factor, consider the advantages and disadvantages you may face when securing a reverse mortgage.
Pro: Retirement Security
Once you retire, your income reduction can make it difficult to cover large expenses. But, the reverse mortgage proceeds can act as an additional source of income and reduce your financial strain.
How is that possible? Well, a reverse mortgage works like this:
- Step 1 – A reverse mortgage lender pays you, the homeowner, with a lump sum, fixed monthly payment, or line of credit based on your home’s market value.
- Step 2 – Meanwhile, the interest rate slowly increases on the loan balance each month.
- Step 3 – You get quick access to cash without having to repay the loan as long as you don’t sell the house.
For those with a high amount of home equity, the biggest benefit of a reverse mortgage is that you receive the money you need when you need it. However, reverse mortgages can still come at a cost.
Convert your Home Equity to Cash
Con: Equity Decreases as Loan Balance Increases
A reverse mortgage loan is still a loan. Your reverse mortgage payments are coming from your home’s equity, which means that the equity is decreasing with each monthly mortgage payment. As your home equity decreases, the amount you owe collects interest and increases your debt.
In short, when acquiring a reverse mortgage, you’re looking at higher debt and lower home equity.
If you’re hoping to leave your home with your children or grandchildren, a reverse mortgage may not be the best solution for you. Once the home is in their name, they would be required to pay the balance of the loan or 95% of the home’s equity, depending on which option is less expensive.
As a result, a reverse mortgage may leave your loved ones with debt and may result in your heirs selling the house. As such, this option may not be practical for those hoping to build generational wealth.
Pro: Stay in Your Home
Before reverse mortgages, if you wanted to gain any money from your property, you would have had to sell it. However, this can be a difficult decision to make during retirement, when your home most likely holds sentimental and real-world value.
If selling your home isn’t an option, a reverse mortgage may be a viable solution.
In a survey by AARP, the organization discovered that:
- 76% of American adults who are 50 years and older say that they want to keep living in their current homes, and 77% want to do so for as long as possible.
- Only 49% of Americans believe they’ll be able to stay in their homes, and 13% believe that they’ll be able to stay in their current community but in a different home.
Having your own home provides a lot of value for those who are getting older. To that end, a reverse mortgage can help older homeowners maintain a sense of security and stay living in their homes.
Con: The Risk of Foreclosure
A reverse mortgage is far from a simple process—when securing a reverse mortgage, you must adhere to a wide list of rules and still cover certain fees and expenses. Failure to do so could mean losing your home.
Despite having a reverse mortgage, homeowners are still in charge of the home’s title. As such, homeowners still need to be able to afford:
- Maintenance and utility fees
- Homeowners insurance
- HOA fees
- Property taxes
If, at some point, a homeowner can’t afford these expenses, the home may go into foreclosure. Additionally, if homeowners choose to live outside of the house for most of the year, their home will also be at risk of seizure.
To mitigate risk, consider partnering with a company that compares options and provides solutions, like EasyKnock. We offer a sale-leaseback program that allows you to sell your home to EasyKnock while remaining as a renter. So you can stay home and be financially secure.
Alternatives to Reverse Mortgages for Retirement
If you believe the risks of a reverse mortgage are too high, there are several additional options available to you during retirement. These include:
- Refinancing your home mortgage
- Taking out a home equity loan
- Taking out a home equity line of credit
- Selling your home
- Downsizing your home
EasyKnock: The Better Alternative
Low in cash but rich in home equity? A reverse mortgage loan may be the solution for you when using home equity for retirement income. But, if you’re looking for a solution that’s customized to your financial situation and allows you to take steps toward financial independence, consider EasyKnock.
EasyKnock takes a dignified approach to financial solutions. When you choose our solutions, you can convert your home equity into cash to help you pay for expenses like home improvements or growing credit card debt.
Leave the worries in the past as you move forward into your future. Get qualified with EasyKnock today so you can start enjoying your golden years from the comfort of your own home.
*This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.
- Forbes. 5 Reverse Mortgage Pros and Cons. https://www.forbes.com/advisor/mortgages/reverse-mortgage-pros-cons/
- AARP. 2018 Home and Community Preferences: A National Survey of Adults Age 18-Plus. https://www.aarp.org/research/topics/community/info-2018/2018-home-community-preference.html
Tom BurchnellProduct Marketing Director
Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast.