You’ve probably seen reverse mortgages ads on T.V.
A retired celebrity or football coach looks you straight in the eye and tells you they understand how an unexpected bill can pop up when you retire. They tell you a reverse mortgage can solve this problem and point you to the number for a lending institution that’s more than happy to help you out.
It’s an annoying sales pitch. But it’s for a product that could help plan for your retirement. That’s because a federally insured reverse mortgage – known as a home equity conversion mortgage – can provide you with a lump sum of cash to use for whatever purpose you like.
These products also carry risks which is why it’s important you know what you’re doing before you make that call. Attending a reserve mortgage workshop will provide you with the pros and cons so you can decide whether you should get a reverse mortgage and how this tool could help you reach your retirement goals.
Reverse mortgages are loans people take out against the equity of their home. Borrowers receive this money in the form of a lump sum cash payment, through a series of lump sum payments, a line of credit they could draw upon as they need it, or as a combination of all three.
But unlike a traditional mortgage, which the borrower pays back over time with the money he or she earns, borrowers pay back the loan when the house is sold after they move out or die. This means the borrower cannot pass the house down to their heirs. They’ll also receive significantly less money from its sale than they would have received without obtaining a reverse mortgage if they get any at all.
Here are a few other things to consider:
- Who stays in the house – One of the most important things to consider when wondering whether you should get a reverse mortgage is who lives or may want to live in your house. Lending institutions can force the sale of a person’s house once the last surviving borrower has left. It’s important to make sure every person who lives in the house is listed as a borrower on the loan or has a plan to leave before the sale. Talking to a financial planner is the best way to learn about your state’s rules for who can stay in the house before you get a loan.
- Fees and interest – Lending institutions often add steep fees and interest payments to a reverse mortgage that will increase while you stay in the house. These payments are added to the balance of your loan and will be deducted from whatever money you earn when it is sold. Talking to a financial planner will help you figure out exactly how much these payments would cost and what, if any, money you and your heirs could receive from the sale of your house.
- Maintenance and Taxes – Borrowers are still responsible for paying their property taxes, homeowner’s insurance payments, utility bills, and any other costs associated with the maintenance of their home. In fact, many reverse mortgages carry rules requiring you to stay current on your tax bills and prescribing a certain level of home maintenance. Failure to follow these rules may result in the forced sale of your house before you’re ready to leave.
- Sales tactics – Many lenders may try to getting you to sign up for services like a “home improvement package” or an “appliance warranty” when you take out a reverse mortgage. These services should be avoided because they are unnecessary and only serve to reduce the money you get from your loan or increase the balance that must be paid back when it is due.
- Other options – Finally, don’t forget that you have other options if you need to get some extra money in retirement. A financial planner, or even someone at your local Area Agency on Aging, can review your situation and help you find the best moves forward.
Federally-insured reverse mortgages carry a three-day recission period that gives borrowers a chance to cancel the loan after they’ve signed the paperwork. The existence of this tool speaks volumes about the risks someone takes when they obtain a reverse mortgage and how it can come back to haunt them if they don’t fully understand what they’re doing.
Sign up for a reverse mortgage workshop today so you can learn more about what a reverse mortgage is and see if they could help with your retirement goals.