Too many of our senior loved ones are trying to get by on retirement savings that have been beaten down by the recession.
Many seniors’ savings is further eroded by their desire to help family members who’ve been hit even harder.
We as family members want to help them make their elder years more comfortable.
We will talk more generally about finances in an upcoming podcast episode but want to focus now on one area of finance: reverse mortgages.
The reverse mortgage is like many tools in other areas – it can be a benefit to those who understand it and have the right application but can also be harmful to those who try to use it without proper understanding of what they’re doing or if it is not the best tool for what they want to accomplish.
Seniors aging in place in their own homes, especially those who have lived in that home for a long time, frequently find themselves in a situation in which the equity in their home makes up a high percentage of their wealth.
While that wealth can be comforting and passed along to heirs, that is of little comfort to seniors looking for the money to meet their current expenses.
That’s where a reverse mortgage comes into play as an option.
What is a Reverse Mortgage?
A reverse mortgage is a form of home loan (money borrowed with your home as collateral) that lets seniors (you must be at least 62) convert some of the equity they have in their homes into cash for whatever use the borrowers choose.
Depending on the lender, borrowers may have several options for receiving the money, including payments over the life of the loan or the establishment of a line of credit, which allows borrowers to draw down the load in times and amounts of their choosing. This type of loan is not repaid while the borrower lives in the house but is due when the borrower dies, moves or sells the house.
Reverse Mortgage Pros
- Money your senior loved ones can use for living expenses or any other purpose.
- Your senior loved ones get to keep their home rather than have to sell it to convert the equity into cash.
Reverse Mortgage Cons
- High up-front fees associated with many loans, though experience with this type of loan and experience among lenders is reducing these fees over time.
- The need to pay off the loan upon the borrower’s death, which may drive heirs to sell a house that loved ones had hoped to pass along.
If one needs money and has all that equity in their home, you might ask, why not simply take out a traditional mortgage or home equity loan? While that would seem cheaper and present more options, traditional loans require a demonstration of income at the time the loan is approved so many seniors cannot qualify.
In the eyes of many advisers to and advocates for seniors, the cons outweigh the pros for most potential borrowers. They suggest a reverse mortgage should be considered a last resort by many seniors, with selling the house or finding other sources of money being preferable.
We at Senior Care Corner feel we ought to help our senior loved ones consider all options that may reasonably help them meet their needs. If staying in their home is important to them, we ought to encourage them to put their needs first (finally!) and not worry about whether there is a house left for us to inherit later.
Shop for the Right Reverse Mortgage
If a reverse mortgage is potentially a viable option for your senior loved ones, make sure they shop around for the best deal rather then dive right into a loan with the first lender whose commercial or mailer they see. As with many financial products – and more than most – there is a wide variety of programs available, with a range of fees and options. This is a place to comparison shop.
There is one more potential pitfall with reverse mortgages. A number of firms and (so-called) advisers charge large fees for providing information that is readily available for free. Yes, another scam targeting seniors.
While legitimate advisers can bring knowledge and experience, the same benefits can typically be gained through some additional effort on the part of your senior loved ones (and maybe some help from you?). Unless using a truly trusted adviser, this is another area in which to do homework to make sure the selected adviser is acting in the interest of your senior loved ones.
There are many sources of information on the internet. One place you might start is the US Department of Housing and Urban Development (HUD).
If you have a reverse mortgage experience from which our community can learn, we would love for you to pass it along!