On the surface, a reverse mortgage seems like a great idea. As you enter retirement, you can use the equity in your home and receive guaranteed tax-free income in exchange for a share of that equity. However, like anything else, there are always downsides, so make sure you have done your research and thoroughly understand the risks of a reverse mortgage.
What Is a Reverse Mortgage?
A reverse mortgage is precisely what the name implies, a mortgage done in reverse. Instead of you making payments on a mortgage, your reverse mortgage provider makes payments to you. You can get your funds in a lump sum, as a line of credit, or in installments, and nothing is owed so long as you live in the home. The reverse mortgage will only become due if you move out, sell the home, or pass away.
Hidden Costs and Fees
Just like a regular mortgage, there are closing costs associated with a reverse mortgage. However, they’re typically much higher than a standard mortgage. Every lender will have slightly different ways to provide a reverse mortgage, and the fees, interest, and other costs will be delineated in the contract terms. Make sure you completely understand all the costs both upfront and over the term of the loan. It can be helpful to have an independent financial counselor review the reverse mortgage paper to ensure you understand all outlined terms outlined prior to signing.
Probably the greatest risk of a reverse mortgage is the uncertainty the future inherently brings. Typically, there are several circumstances in which the reverse mortgage comes due in full immediately. For example, If you end up in an assisted living facility or nursing home, you would be forced to sell the home and pay back the loan.
You are also required to keep up on the taxes and keep current with homeowners insurance as well as sufficiently maintain the property. If you become disabled or the rest of your income stream evaporates and you are unable to fulfill these requirements, the lender can immediately call the loan due in full.
Getting Out of a Reverse Mortgage
Perhaps you already have a reverse mortgage and have now decided it would not be in your best interest. The good news is that you can learn how to get out of a reverse mortgage. If you are within three days of signing the paperwork, you can rescind the agreement with no financial consequence. Beyond that, you could also sell your home, take out a home equity loan or home equity line of credit, or use your savings to pay it off. If none of these sound like viable options, Point offers a Home Equity Investment that provides more flexibility than a reverse mortgage as well as having no payments during the 30-year term. Talk to your financial advisor to see what option works best for you.