The following is guest post from Zillow.com’s Jay Robert. I’ve written before how useful I’ve found Zillow in estimating the value of my condos, especially because they have a lot of similar properties to crunch the numbers on.
Reverse mortgages seem compelling, allowing older homeowners to convert the equity they’ve built in their homes into cash. But is a reverse mortgage a good plan for retirement?
What Is a Reverse Mortgage?
First, it’s important for homeowners to understand how a reverse mortgage works. With a traditional mortgage, a homeowner pays the lender monthly payments until the home is owned outright. In a reverse mortgage, the lender pays the homeowner either a lump sum, monthly payments or extends the homeowner a line of credit, but when the borrower dies or sells the home, the loan must be repaid in full. The amount of money the lender pays the homeowner is based on the value of the home, the interest rates and the homeowner’s age, which must be at least 62. Many older homeowners use reverse mortgages for income during retirement while benefiting from living in their homes.
A reverse mortgage may provide much-needed income for homeowners who haven’t saved enough for a comfortable retirement. As long as the property is appreciating in value and the homeowner borrows only a reasonable sum, the mortgage can be a good option. Even if the home depreciates in value and the sale of the home does not cover the amount of the loan, the homeowner or the heirs are not responsible for any overage. The homeowner’s heirs must pay back the borrowed funds and cover the lender’s fees upon the homeowner’s death if they wish to keep the property, but that sum may be manageable if the loan is conservative. Typically, heirs sell the home to cover the costs owed to the lender, with any surplus going back to the estate. Borrowing from a lender should always be a thoughtful decision, especially with reverse mortgages obtained later in life, when the burden to repay may affect the amount of the owner’s estate.
Reverse mortgages are expensive. Fees apply for loan origination, appraisal, title insurance and other closing costs. These charges sometimes cost double or triple the fees associated with traditional mortgages. These fees are usually rolled into the cost of the loan.
Homeowners with reverse mortgages typically have less to leave their heirs because they are removing equity from their homes. Heirs are left with the burden of selling the home or repaying the loan and fees in full to take ownership of the home. Additionally, homeowners are still responsible for paying the property taxes, insurance, maintenance, utilities and other expenses associated with their properties or risk losing the homes.
Homeowners should consider all of the alternatives before opting for expensive loans that can burden their family members. Consider selling the home to buy a less expensive residence, and apply the remaining funds toward retirement. Homeowners might decide to continue working for a few more years to save for retirement or pick up a part-time job for extra income.
If homeowners decide to go with reverse mortgages after considering the benefits, drawbacks and alternatives, they should shop around as the costs of reverse mortgages vary widely. Read the fine print in order to understand the terms and conditions of the loan, and discuss the plan to repay the loan with the beneficiaries of the estate.