Is a Reverse Mortgage Beneficial?
A reverse mortgage sounds similar to a line of credit or home equity loan. Indeed like these loans, reverse mortgages provide a line of credit or a lump sum which you can access if need be depending on the amount you’ve paid off for your home and its market value. Different than a line of credit or a home equity loan, the borrower does not need good credit or an income to qualify or make loan payments while occupying the home as the primary residence.
The only way you can access home equity and not sell the home is through reverse mortgage for seniors who want to avoid the responsibility of paying monthly installments or those who don’t qualify for a refinance or home equity loan due to poor credit or limited cash flow.
What are your options for utilizing home equity for your retirement funding if you don’t meet the qualifications for any of the loans? You can downsize or sell, or even sell to your kids or grandkids to keep your home in the family. You could also consider renting from them if you wish to continue residing in the home.
Pros and Cons
If your biggest asset is your home equity once you are 62 years of age and above, a reverse mortgage is an excellent way to get cash. You can continue occupying your home so long as you are able to keep up with maintenance, insurance, and property taxes and don’t have to move into an assisted living facility or a nursing home for more than one year.
Nonetheless, a reverse mortgage translates to spending a good chunk of the accumulated equity on loans fees and interest, which we will cover below. You also likely won’t have the ability to pass your home to your heirs. If getting a reverse mortgage isn’t providing a long-term financial solution, just a short-term solution, it could not be worth it.
What if you live with your friend, roommate or relative? That person has no right to continue occupying the home after you pass on if you take a reverse mortgage.
Outliving mortgage proceeds is a problem some borrows face with reverse mortgages. If you select provide lifetime income, including a term plan or lump sum or you go for line of credit and utilize it all, you could be broke when you urgently need it.
Interest Rates
All types of reverse mortgages apart from, the lump-sum which give the borrower all proceeds at a go, have variant interest rates. These interest rates change constantly and are linked to the London Interbank Offered Rate (LIBOR).
Additionally, the lender increases the margin by three or two percentage points. If LIBOR is 2%, and the lender is 1.8%, your rate will be 3.8%.
