A reverse mortgage can be a great financial tool that lets you access your home’s equity for various financial goals. A reverse mortgage is a great resource for some, but it isn’t for everyone. Asking key questions and evaluating your personal and financial goals can help you determine if a reverse mortgage makes sense for you.
What Are Your Retirement Goals and Dreams?
After accounting for financial and physical limitations, your retirement years offer a blank slate to fill however you like. Asking where you want to be in the next five years is a good way to begin thinking about how you want to spend your golden years. For some, retirement is about luxury trips to exotic locations or buying an RV and touring the country in style. For others, retirement is about the luxury of staying home and spending time with family. Whatever your dream retirement looks like, setting goals is one thing, but paying for them is another.
If you have enough equity in your home but not enough cash flow to fulfill some of these retirement goals and dreams, a reverse mortgage could help. Discussing your current financial situation, goals, and the possibility of a reverse mortgage with a trusted financial advisor can help you decide if a reverse mortgage makes sense for your particular situation.
It is important to understand that a reverse mortgage is a loan, and the money you take now will need to be paid back, plus interest in the future. The loan will come due if you choose to sell your home, pass away, or fail to keep up with property taxes or home insurance.
Do You Want to Stay in Your Home?
Deciding where you’ll live is an important part of a strong retirement strategy. Look at your current home and evaluate whether it will suit your lifestyle and physical requirements as you age.
Some questions that may be helpful to answer are:
- Do you like where you live?
- Do you have close friends or family nearby?
- Do you plan to spend much of the year there?
- Is the size of your house manageable or desirable for you?
- How realistic is it to adapt the house to age in place?
If you determine your house is a good place to stay and have built up considerable equity in your home, taking a reverse mortgage may be a smart strategy to help you stay long-term. Eliminating required monthly mortgage payments can improve your cash flow. It can also provide funds for making any upgrades or repairs you’ll need to live there safely and comfortably.
Do You Want Your Heirs to Inherit Your Home?
Your financial decisions are up to you, and you have no obligation to discuss a reverse mortgage with your heirs. However, talking to your children about their expectations for your home can avoid misunderstandings and potential disappointment. Children and heirs may react differently to the idea. Some may not be interested in inheriting the home, while others may assume they will. Understanding how they feel can help inform your decision.
With a reverse mortgage, your heirs can keep the home; however, the reverse mortgage loan will need to be repaid for them to do so. Once the last borrower dies, heirs are responsible for resolving the loan balance. They can choose to do that by selling the home or finding another way to pay the outstanding balance, or they can transfer the deed to the lender with a deed in lieu of foreclosure. Heirs will never owe more than the value of the home when it is sold to resolve a reverse mortgage.
Many people don’t have large amounts of cash available or the ability to take on a new mortgage, so it’s worth noting that though they will inherit the title and the house, to keep it, they’ll need to pay back the loan. Though heirs are given the choice to repay the loan, they do not inherit debt. Regardless of how they settle the loan, their credit rating and finances will not be impacted.
How Would You Pay an Unexpected Bill?
It’s impossible to predict every financial emergency that may come your way, but that doesn’t mean you can’t implement a plan to address unexpected health costs or other expenses that are likely to arise. If you don’t feel your retirement budget has much wiggle room, taking a reverse mortgage may offer the peace of mind that comes with knowing money is available when and if you need it.
Reverse mortgage proceeds are available to borrowers in a lump sum, monthly payments, as a line of credit, or a combination of the three. Because a reverse mortgage offers a variety of options for accessing funds, these loans allow borrowers to select allocations that make the most sense for them. For people with a significant amount of equity but no immediate need for additional funds, a reverse mortgage line of credit may offer a hedge against the unforeseen. Borrowers with a short-term need may elect to take the funds they need up front and reserve the excess in a line of credit.
Thinking about reverse mortgage proceeds from a strategic perspective is essential when deciding whether to take one. Understanding your level of financial wellness with the help of a financial advisor can help you determine if this vehicle is an option for you and how best to take advantage of it.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.