You've seen the commercials: an older, serious-looking gentleman with an authoritative voice talks about how and why you should consider a reverse mortgage to help fund your retirement, get the kids through school, maybe work on those house projects and renovations you've been putting off for so long. He makes it sound so easy. He makes it sound perfect for your needs. He makes you want to call that number on the screen and set up a reverse mortgage on your house right away.
Well, hold on. Just what is a reverse mortgage? And why aren't they deserving of all the hype? Are there alternatives to a reverse mortgage to help fund your retirement?
To address the the first question...
WHAT IS A REVERSE MORTGAGE?
A reverse mortgage is a loan you take out against the equity in your home. Basically, you're getting some of the money back that you put into your house through the original mortgage payments. The longer you've lived in your house, the more mortgage payments you've made and, therefore, the more equity you have in your home that you can draw from.
SO, WHAT'S WRONG WITH A REVERSE MORTGAGE?
Depending on the type of reverse mortgage you get, you could run into several issues:
- Free money! ... Not. Many people don't understand that a reverse mortgage is a loan, not a big wad of money stashed away in a savings account, and eventually that loan will have to be paid back to the lender with interest. So, if you ever decide to move, or the house you borrowed against is no longer your primary residence, or if you pass away, the money will begin to flow the other way -- out of your pockets and back into the hands of the lender.
- What inheritance? By taking out a reverse mortgage on your house, you are removing stored-up equity in your home, leaving fewer assets for yourself in the short term and possibly a negligible amount for your children once you pass away.
- Fees, fees and ... more fees. Fees associated with a reverse mortgage are like flies: they appear when you least expect (or want) them to, and tend to grow in number over the lifespan of the mortgage. Some of the fees you can look forward to? Fees for closing costs (aka signing on the dotted line and officially having another mortgage on your house), as well as routinely scheduled service and maintenance fees for as long as the mortgage is active.
- Go on! Spin the wheel ... to find your interest rates. Many (but not all) reverse mortgages have variable interest rates that fluctuate according to the whims of Wall Street. In other words, they're about as steady as a drunken sailor standing on a tipped-over canoe in the middle of the Atlantic Ocean during hurricane season. One month, you might pay only ten percent interest, but the next month they may slam you with a twenty-five percent rate. And if you decide to go with one that has a fixed rate, you might not be able to borrow as much as you could with a variable-rate mortgage.
ALTERNATIVES TO A REVERSE MORTGAGE
All is not lost, however. With a bit of research and effort, it is possible to find sources of money that don't require taking out a reverse mortgage. Possible alternatives include:
- Sell. Unless you live next door to Donald Trump and thirty of his closest and richest friends, the occasional yard sale won't cut it. But if you have stocks, insurance policies or other investments that aren't pulling their weight for you, you should consider selling them as a means to get the cash you need. Think of it as spring cleaning your finances. You might also consider selling the house itself and downsizing to a smaller one that won't suck the life out of your savings.
- Refinance. By refinancing the mortgage you already have, you not only have a chance to free up some money, but you will also be more likely to find a rate that works much better for your situation, especially if you have recently retired and are still adjusting to the lack of a regular paycheck.
- Wait. Are you due to start collecting on an annuity soon? Or maybe an inheritance? If so, and you don't need the money immediately for an emergency, then it might be in your best interest to bide your time and save up the money for whatever projects you have in mind. Yes, it will take longer, but you won't have to go through the hassle of finding the right lender, the right reverse mortgage or the right payment structure. And you'll have it in cash, no strings attached, no fees, no loans that have to be paid back. It will be one hundred percent your money.
Your golden years should be a time to make up for all the years of hard work you put in and catch up on activities you enjoy, like fishing, traveling and working on all those household projects you always meant to complete someday. Some of those activities will cost money, and if you play your cards right, you can avoid having to take out a costly loan such as a reverse mortgage.
If you have any doubts about what you should do, though, talk to your financial advisor or a retirement planning expert, like those at Richard Brown Investments. They have the knowledge and expertise you need to make an informed decision about your financial concerns.
But above all, enjoy yourself. You've earned your rest.Share