A reverse mortgage lets you borrow against the value of your home without paying back any of the loan during your lifetime. Instead, the loan is repaid when you move permanently or, more likely, after your death. At that juncture, the total amount owed, including all accrued interest, can’t exceed your home’s value. You can typically borrow more if you’re older, interest rates are low or your house is appraised at a high value. The money received is tax-free.
The big downside is cost. To get a handle on the expenses involved, try playing with the calculator offered at ReverseMortgage.org, which is the website of the National Reverse Mortgage Lenders Association. At the bottom of the calculation, you’ll see a figure for “Total Fees & Costs.” This doesn’t, however, tell the entire story. At the top of the estimate, check out the initial loan interest rate—which will likely be higher than on a conventional mortgage—and the charge for mortgage insurance that’s layered on top of that.
In addition, keep in mind that you still have to handle the home’s maintenance, property taxes and insurance. If those expenses prove too burdensome, you may be compelled to move, at which point the reverse mortgage has to be repaid.
One option for well-heeled families: Arrange a private reverse mortgage. To help their parents pay for retirement, adult children or other family members might provide a credit line that is secured by the parents’ home. That gives the parents access to extra cash, while the adult children can be fairly confident they’ll eventually get their money back, plus interest. The costs involved are far lower than with a conventional reverse mortgage, and it ensures the house stays in the family. For more information, head to NationalFamilyMortgage.com.
Our Humble Opinion: Despite all the drawbacks, you shouldn’t rule out a reverse mortgage. Let’s face it: You get only one shot at retirement and you should make the most of it, even if it means spending assets you had hoped to bequeath to your children. That said, you should consider a reverse mortgage a last resort, not your first choice.
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