Many older Americans experience financial stress in retirement. Those in need of cash may be tempted to turn to their home as a source of income, whether that is by owning and earning rental income or by leveraging the equity in their home. In fact, many seniors turn to reverse mortgages due to lack of access to additional sources of income.
A reverse mortgage is a loan secured by the equity in your home. In the past, this borrowing option was only available to people aged 62 and over. Now, young homeowners can access a reverse mortgage. But whether that is a wise call is another story.
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A new product for young owners
Reverse Mortgage Funding, LLC (RMF) recently announced an update to its proprietary reverse mortgage product, Equity Elite. Now, borrowers aged 55 and over can apply for a reverse mortgage in some states. A total of 2.7 million homeowners could now be eligible for a reverse mortgage. And in some ways, that’s a good thing.
Many Americans are entering retirement without personal savings. And as pension schemes are no longer as common as they used to be, many future retirees risk a significant shortfall, especially if Social Security benefits are cut in the future (an option that is currently on the table depending the financial statement of the program and trust funds). For people in this boat, a reverse mortgage can be a lifeline.
But reverse mortgages are also a mixed bag. While they can be fairly easy to qualify, since they are largely dependent on home equity, they do come with downsides.
First, these products usually come with high closing costs that eat into borrower revenue. Additionally, while reverse mortgages are a source of income, they don’t necessarily make homeownership affordable for seniors on fixed incomes, especially in the face of rising property taxes and repair costs.
Plus, at the end of the day, a reverse mortgage is a loan that must be paid off. If not, a lender can force the sale of an entire house.
If you take out a reverse mortgage and don’t pay it off while you’re alive, when you die, your lender can go after your estate to settle it. This could leave you in a situation where you cannot pass your house on to your heirs.
A better solution?
These days, many homeowners are sitting on greater equity in their properties as home values have hit record highs nationwide. Retirees who find themselves strapped for cash may be better served to apply for a HELOC or home equity line of credit.
A HELOC can serve as an emergency fund without the commitment that comes with taking out a reverse mortgage. Granted, HELOCs come with a limited drawdown period (typically five to 10 years) during which borrowers can access their funds. But they are still a solution to be sought for near or retired homeowners who are uncomfortable with the level of savings they have accumulated. And while HELOCs, like reverse mortgages, need to be paid off, they can be more affordable when you consider closing costs.
While opening reverse mortgages to younger borrowers might sound like a good thing in theory, it’s important to proceed with caution before taking on one. If you want to get a reverse mortgage, make sure you understand what you’re getting into before committing to a loan that might not be right for you.
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