A Reverse Mortgage Could Mean a Comfortable Retirement

 Reverse mortgages aren’t new; they have been around for about twenty years. Reverse mortgages still comprise about one percent of all mortgages. Reverse mortgages have been federally insured since the late 1980’s, and they offer a great opportunity for homeowners of at least 62 years of age to cash in on the equity in their home. Until recently, they have been rather scarce, but recently, the reverse mortgage has become a popular lending product. Reverse mortgages were originally regarded as a “last resort” source of finances for older citizens who had financial trouble brought about by health problems or failure to maintain their home. Times have changed, however, and today retirees are using the reverse mortgage to fund the retirement of their dreams.

The explosion in the real estate market of the last five years has left many retirees “cash poor” but “equity rich.” That is, they may not have a lot of money in the bank, but they might have a home that is worth many times the original purchase price. A reverse mortgage is a loan that lets a homeowner who is at least 62 years old borrow against the equity in their home. The money can be taken in a lump sum, monthly payments, or as a line of credit. Interest accrues on the borrowed sum, but payment is not due until the homeowner dies or the home is sold. In the meantime, retirees are now using the equity in their home to fund vacation homes, boats, recreational vehicles and luxury vacations. The structure of a reverse mortgage allows a homeowner to pay cash for any of these items while continuing to live in their home for the rest of their lives, if they wish. Once the home owner passes away, the home put up as collateral for the loan will be sold to repay the loan. Anything purchased with the money from the loan, such as a second home, will become part of the homeowner’s estate.

The reverse mortgage has provided an unusual opportunity for homeowners who were never able to put away a lot of cash to enjoy a healthy and pleasurable retirement. Many couples who could never afford to travel can now borrow against the value of their home and take a cruise, or see Africa, or buy an RV that lets them travel throughout the country.

This appears on its surface to be a win-win situation for all involved, but there are some things to consider when taking out a reverse mortgage. For most Americans, the home is their single largest asset, and borrowing against their home equity always comes with risk. What if a homeowner took out a reverse mortgage, purchased an expensive second home with the proceeds and then had a medical emergency costing tens of thousands of dollars? What if a husband or wife becomes incapacitated and requires lengthy hospitalization? Are there funds available to pay those expenses? These things, and others, must be considered before using home equity for any luxury expense, such as a recreational vehicle or a vacation home. Anyone considering such a purchase should first discuss the loan with a financial advisor.

While there are drawbacks, the reverse mortgage does offer a number of opportunities to homeowners who may otherwise be strapped for cash, and interest in this mortgage product continues to grow. With interest rates still near all-time lows, the reverse mortgage will probably continue to grow in popularity.