The way that a reverse mortgage works is simple: Homeowners 62 years or older, take out a loan from their bank based on the amount of equity they have in their house. The home’s equity is based on how much it is worth, minus any outstanding loans. When borrowers take out an HECM, they cease all loan payments to the bank, and can continue to live in their house until they, and their spouse, if they have one, pass away. All that is required of homeowners is that they continue to pay property taxes and homeowners insurance, while maintaining basic upkeep of the house. So how do you know if an HECM is good for you? Here are three things to consider before making your choice.
Do You Need The Money?
A reverse mortgage is designed to help elderly retirees make financial ends meet. Since the annual social security benefit is less than $20,000, many people need a way to supplement their income. If your income is not allowing you to pay for your bills each month, an HECM can help you with that. Homeowners also see an increase in income as the result of an HECM, since they no longer have to pay their house’s note to the bank. In some cases, people will set up an HECM with an available line of credit against their home equity, but not actually borrow anything. Simply stopping the payments to the bank was enough to right their financial ship.
Do You Have Heirs/Do They Need Your House?
One major result of an HECM is that the bank often ends up with the house. If you have heirs, but they are doing well financially, not inheriting your house would not have a huge negative impact on them. If your heirs have a sentimental attachment to the house, as many do, they will have the opportunity to pay off any existing debt after your passing, in order to keep the property. If you do not have any heirs, there is little reason to not utilize the equity of your home.
You Can’t Take It With You
Any competent financial adviser will tell clients that a “you only live once,” approach to finances will not end well. However, these clients are generally early in their careers, with 30-40 years to go before retirement. For someone who is already retired, and may have a decade or two left to live, “YOLO” can be pretty good advice. If you want to visit your family around the country, travel to exotic locales, or simply enjoy a higher standard of living for your last few years, a reverse mortgage can give you the financial freedom to do so.
In conclusion, a reverse mortgage has its time and place. It is up to you to decide if your situation makes an HECM a good fit for you.