Ella Fitzgerald famously sang about how the livin’ is easy in the summertime, but sometimes living can be financially challenging — no matter what season of life you’re in.
Did you know that housing is the costliest expense for American families on average? (This includes monthly rent or a mortgage.) According to Forbes, your mortgage is one of five things that will swallow over 50 percent of your lifetime earnings. (Wow!)
When it comes to refinance options for your home, there are several available to those who are aging, such as a reverse mortgage. Over 25 million homeowners in America are 62 or older, and over 600,000 of them use reverse mortgages.
A reverse mortgage is a loan for senior homeowners where a lender pays YOU. (Say, what?!) The loan uses the home’s equity (i.e. the difference between the property value and what is owed on the house) as collateral. In other words, the bank loans you the value of your equity in the house. The loan typically does not have to be repaid until the last surviving homeowner permanently moves out of the home or passes away. Basically, the bank gives you money that you don’t have to pay back until you’re done living in the house. If you (or your heirs) can’t afford to pay back the loan, the bank takes the house, and/or anything else of the estate, as payment.
The “reverse” term can be confusing, but it refers to the role-reversal — the lender paying you, versus you paying the lender in a traditional mortgage to make payments on your home.
The catch of reverse mortgages is that it can be easy to rack up debt. It can be tempting to have access to instant funds, but if you don’t fully understand the loan’s terms and conditions, reverse mortgages can be financially risky.
Things to Consider When It Comes to Reverse Mortgages
- Often called “loans of last resort,” reverse mortgages are paid out as a line of credit, as a lump sum, as monthly payments, or a combination of these options.
- You are still responsible for property taxes, insurance and maintenance.
- Interest is added to the loan monthly, meaning the amount you owe gets bigger every month.
- You must remain a permanent resident of the home and you or your estate must pay the entirety of the loan back when you are no longer the homeowner (i.e., you move out and/or pass away.)
When and When Not to Use a Reverse Mortgage
According to a financial expert, prime candidates for reverse mortgages are those who have paid off their mortgage before retirement and want to stay in their homes, but don’t have enough resources to cover everything that may happen. It’s suggested that these candidates use the line of credit option, tap into it only when necessary, and “defend against future, unknown long-term care costs with little out-of-pocket expenses.”
One woman, who required around-the-clock medical care, took out a reverse mortgage to reduce her reliance on the rest of retirement savings to fund her healthcare bills.
Reverse mortgages are not a good option if you’re just looking for a quick dollar to pay expenses or if you want to leave your home to your children and/or grandchildren. A loan is a loan and will have to be repaid at some point in time, either by you or your estate.
So… why are we even talking about reverse mortgages? Because your fiscal health is just as important to us as your actual health, and we’re committed to sustaining both.
The livin’ may not always be easy, but what does make it easier is affordable things like healthcare. Agree? We thought so. Join us in rolling back state-based mandates that drive up the cost of healthcare for everyone — no matter their age.