A number of retirees use reverse mortgages as a way to get extra cash. Should you?
At first glance, reverse mortgages seem like an ideal way for retirees to tap into the equity in their homes. If you take out a reverse mortgage, you don’t have to sell your home or incur a monthly loan payment. And most reverse mortgages require no repayment for as long as you live in your home.
To qualify for a reverse mortgage, borrowers must be at least 62 years of age, have paid off their traditional mortgage or have a low loan balance. The more your home is worth and the older you are, the larger amount you are likely to qualify for. While everyone’s situation is different, here’s why for many people, reverse mortgages aren’t such a great idea:
It’s an expensive way to get extra cash. The fees on a reverse mortgage – which include mortgage insurance premiums, origination fees and other closing costs – can be twice or three times as high as with a traditional mortgage. That’s just one reason why reverse mortgages are considered by many financial advisers to be loans of last resort.
You can still lose your home. While the idea of a reverse mortgage is that you can get extra cash while remaining in your home as long as you live, nearly 1 in 10 reverse mortgages are in default. How can that be? With a reverse mortgage, homeowners are responsible for paying the annual taxes, property insurance and maintenance on their property. If they don’t fulfill their responsibilities, their loan could be considered to be in default, which puts the homeowner at risk of foreclosure.
For more information about reverse mortgages and potential hazards to watch out for, check out this informative guide from AARP.