Is a reverse mortgage right for you?
For retirees worried about running out of money, it might be smart
After Eileen Redden inherited her idyllic childhood home last year, she knew she wanted to live out her days there.
Enamored with the 1945 Cape Cod in Bayside, N.Y., she threw herself — and her savings — into renovating it.
But soon after Redden had spent considerable money on improvements, her business-coaching firm lost a top client. With retirement looming, Redden, 63, needed another source of income.
Today, she’s breathing easier with a reverse line of credit that allows her to pull money from her house as she needs it. Being able to stay in the home she loves while tapping its equity for a financial cushion was a win-win, Redden says.
“The key to deciding if a reverse mortgage is right for you is finding the right company to work with,” says Redden, who did extensive research before contacting American Advisors Group based in Orange, Calif.
“My loan officer took the time to listen to my financial goals, and there was no pressure or sales pitch.”
Redden is one of 58,000 people who took out a home-equity conversion mortgage in 2015, according to the National Reverse Mortgage Lenders Association. An HECM is a federally insured reverse mortgage through the Federal Housing Administration.
If you’re nearing retirement or already there, and you’re worried you won’t have enough money, a reverse mortgage might be a smart strategy. HOW THEY WORK Reverse mortgages let homeowners 62 and older access their home’s equity without paying a monthly mortgage or taxes on the proceeds, says Chad Nicholson, a mortgage broker with American Financing in Aurora, Colo.
The FHA’s requirements to apply for a reverse mortgage include that you must be at least 62, that your home is your primary property and you live in it full time, and that you have no delinquent federal debts.
A reverse mortgage isn’t free money; you have to repay the loan when you sell the home or when you or your spouse no longer live in it, Nicholson notes. However, your surviving heirs still receive any equity beyond the owed loan amount when they sell the home.
The amount of money you receive is based on a sliding scale of life expectancy; the older you are, the more you can pull out.
All of these reasons make a reverse mortgage a safer option than a home equity line of credit or a personal loan, both of which typically come with higher interest rates and stiff penalties if you miss a payment, Nicholson says.
“In retirement, it’s all about having cash flow flexibility and living a simpler way of life,” Nicholson says. WHAT IT COSTS One of the drawbacks of a reverse mortgage is the financing costs. Borrowers can expect to pay up to 6% of their home’s appraised value in fees, including a mortgage insurance premium, thirdparty fees for closing costs, a loan origination fee and a loan servicing fee. Typically, you can roll most of these fees into your loan.
Also, there is a mandatory $125 financial counseling fee required by the FHA. WHEN TO USE ONE Two-thirds of Baby Boomers who were employed in the private sec- tor have no retirement income aside from Social Security, while having less than $25,000 in savings and investments.
“Retirees are affected by a lot more risk, and they’re more vulnerable to market volatility,” says Wade Pfau, professor at the American College of Financial Services. “That’s where a reverse mortgage is a useful retirement income tool if you plan to stay in your home long enough to recoup the (loan) costs.”
If you’re a big spender, taking out a reverse mortgage could add to the problem. Be responsible with how and when you use the loan proceeds, or a reverse mortgage could cause more problems than it solves, Pfau says.