For some retirees, their financial plan centers on selling their home, downsizing to an apartment or smaller home, and using the remaining proceeds to help fund their retirement. Sounds like a good plan, until you retire and the housing market slows. Unfortunately, for many retirees, this is a current reality. If you find yourself in this situation, then you may want to consider a reverse mortgage.
A reverse mortgage enables homeowners, age 62 and older, to convert the equity in their homes to cash, without selling the property. The homeowner retains title and all the responsibilities of home ownership, such as taxes, insurance and maintenance. The homeowner or their estate ultimately has to repay the amount borrowed, plus interest and fees. But that repayment is not required until the homeowner dies, sells the home or stops living there permanently (perhaps to live in a nursing home). At no point is the borrower or their estate responsible for more than the price for which the home is sold. However, if the borrowers' heirs decide to retain the home, the entire outstanding loan balance will be required to be repaid.
Flexible financial options
Reverse mortgages offer the flexibility of financial options. The borrower can receive money as a lump sum payment, fixed monthly payments, a line of credit, or any combination of these. Additionally, funds from a reverse mortgage aren't taxed, since they are loan proceeds, not income. Homeowners may change their financial choice as their needs change. Borrowers can never be forced to leave their homes, as long as the property taxes and insurance payments are maintained. The amount of reverse mortgage equity you qualify for depends on factors such as your age, current interest rates and the value of your home. Income and credit history are not considered during the underwriting process. This is a great advantage for seniors who have trouble qualifying for traditional loan products.
Another often overlooked benefit is there are never any monthly payments due and you can stay in the house you have come to call home. The emotional peace of mind of being able to remain in your house is truly priceless. Of course, there are trade-offs. Compared to a regular mortgage or home-equity loan, the closing costs are usually higher. Therefore, reverse mortgages are not for everyone and should not be entered into lightly.
As is the case with any product, you may encounter people seeking to take advantage of you. That is why it is important to work with a reputable lender. One way to protect yourself is by working with a company that is a member of the National Reverse Mortgage Lenders Association. Members of NRMLA subscribe to a code of ethics focused on protecting the homeowner.
If you are interested in exploring a reverse mortgage, ask your lender to educate you on your options. Do not sign anything unless the process is clear to you. If you are unsure, invite a friend or family member to be part of the process. The goal here is peace of mind.
Laura Medigovich is a financial planner and assistant vice president for M&T Bank's Hudson Valley region. Her column appears Sundays.
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