There are swarms of Baby Boomers retiring and on the verge if retiring, but with savings low
and other investments not bringing in much to put toward retirement, boomers are looking
for alternatives. Reverse mortgages are one solution they are starting to consider more than
previously due to the large amount of equity in their homes, according to a recent article
from U.S. News & World Report.
A reverse mortgage can be used instead of a traditional home equity line of credit in certain
cases and can be more flexible, because with a reverse mortgage the borrower has the
option to repay the loan, David Peskin, president of Reverse Mortgage Funding, explained
in the article.
There are different perspectives from various financial experts on how to use a reverse
mortgage in retirement but there are some facts that everyone should be aware of before
taking the leap into a reverse mortgage, U.S. News writes.
Many people are still using a reverse mortgage as a last resort as a way to stay in their home
when they’ve run out of funds elsewhere.
“It makes sense if you need the money and have no other sources to stream it from. You
have to take care of No. 1, that’s you,” Michael Foguth, founder of Foguth Financial Group in
Brighton, Mich., said in the article.
Another thing that potential borrowers should be aware of is that interest rates and closing
costs for reverse mortgages can be higher than a traditional 30-year fixed rate mortgage, the
article explains. The percentages may actually be pretty close, but the amount the borrower
will pay in interest can vary widely.
A perk when using a reverse mortgage is that borrowers don’t have to make monthly interest
payments on the loan or on their home, the article notes.
“What makes a reverse mortgage appealing is it doesn’t have to be paid back, which is why
many homeowners use them as last resort for income,” the article writes. Though, this is
statement is not exactly true, since technically borrowers do need to pay back the loan; but
they generally do so with the sale of their home.
The loan is also non-recourse, which means even if the home value drops, neither the
homeowner nor the estate is responsible for the difference. But borrowers also need to keep
in mind they will still be required to keep up with other payments on the home.
“Even if you do the reverse mortgage, you still need to pay property taxes and you must
maintain the property, otherwise (the bank) can take the house,” Ash Toumayants, founder of
Strong Tower Associates, said in the article.
“You can’t get a home equity loan for a kitchen, that’s over because most of the time there’s
not enough money. Those are big concerns,” Toumayants added. “It eliminates flexibility and
choice, so you can’t, say go live with the kids (and keep your equity). It’s a privilege to have
choice and flexibility. That’s what being wealthy means.”
Source: Alana Stramowski, U.S. News & World Report