Reverse mortgages are a hot topic among retirees, as well as those thinking about retirement, for good reason. If you're at least 62 years old and owe little or nothing on your home, you're probably eligible for a reverse mortgage through the Federal Housing Administration. The FHA's reverse mortgages, by far the most popular option for borrowers, are known as Home Equity Conversion Mortgages, or HECMs for short.
Unlike a conventional mortgage, on which you make monthly payments until the debt is settled, no payment is due on a reverse mortgage until you die, leave your home or sell. In most cases when you take out a reverse mortgage, you receive either a lump sum immediately or regular payments over time. The amounts are determined by a number of factors including your age (the higher the better), current interest rates (the lower the better) and the value of your home (the higher the better). For example, a couple in their mid-60s who own a $250,000 home might be able to get north of $130,000 from a lump-sum reverse mortgage.
While the prospect of receiving a big wad of cash that doesn't need to be paid back as long as you live is tempting, reverse mortgages have significant drawbacks. Topping the list is the expense. Origination fees alone can run as high as $6,000. Other closing costs, service fees and mortgage insurance premiums can total thousands more. Interest keeps accruing until the loan is repaid.
(FHA hopes to unveil a lower-cost reverse mortgage, dubbed the "HECM Saver," later in 2010. The loan amount from a HECM Saver would be less, but so would the fees. In the meantime, the standard HECM is just about the only game in town.)
In my opinion, a reverse mortgage should be considered a trump card that only gets played later in life, say when you're in your 70s or 80s, still healthy and intent on staying in your home for the duration. In that case, if few other assets are available, a reverse mortgage can provide a needed boost in income. Severe economic hardship can be another legitimate reason to resort to a reverse mortgage.
Because of the high costs and risks associated with reverse mortgages — remember, you're out those up-front fees if you're forced to repay the loan for any reason soon after taking it out — it's essential to examine all of the alternatives first. Here are some of the options to consider before committing to a reverse mortgage:
Tapping other resources. Do you have substantial cash value in a life insurance policy that is no longer needed? Are you likely to be receiving an inheritance? Do you have investments or real estate holdings that aren’t providing any income but could be sold? Are you eligible for any low-income assistance?
Refinancing. If you currently have a mortgage on your home, would refinancing at today’s rock-bottom mortgage rates lower your payments? Would taking out cash through a refinancing provide needed income while allowing you more flexibility than a reverse mortgage?
Relocating. If you live in an expensive area, have you considered relocating to a lower-cost locale? This is a popular option for retirees who want to stretch their nest eggs and lead a simpler life. After all, there's a huge cost-of-living differential between, say, New York's Manhattan and Manhattan, Kan.
Downsizing. Do you really need to stay in your current home? Does it have more space than you need? Is it likely to require a lot of costly maintenance in the future? Downsizing your living quarters can have many lifestyle advantages in addition to the cost savings.
Sharing your home. If you have more space than you need and your finances are tight, sharing your home with a friend, family member or even a stranger can help make ends meet. Try to find roommates who are compatible with your lifestyle.
Selling and renting. Homeowners who are being pinched financially should also think about selling their houses and renting instead. There are buildings and communities that cater to renters 55 and up. Selling a home, especially one that you've lived in for a long time and that has appreciated, can free up needed capital. And by renting, you can let someone else worry about maintenance and landscaping.
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