Reverse mortgages for seniors: the benefits and drawbacks

The baby boom generation will be forced to make important financial decisions as they begin to retire.

The most important will be determining whether a reverse mortgage is a suitable financial instrument for them given their financial situation.

To that end, I will list the advantages and disadvantages of using this kind of mortgage… this way you can get an objective and unbiased view as to whether or not a reverse mortgage may be the right decision for you.

Pro:

Most importantly, by letting you keep your home, this kind of mortgage will assist you in maintaining your financial independence… without making payments… through the life of the loan. And as I said, there are no payments made to the lender on the reverse mortgage

Only once you stop living in the house is the entire loan balance due.

You are free to use the loan proceeds however you like; there are no limitations… you use it as you see fit.

Some of the fees and expenses related to the loan are restricted because the industry is highly regulated.

The non-recourse clause, which stipulates that you can NEVER owe more on the mortgage than the house is worth, will also be advantageous to you. Seniors are worried about this to a GREAT DEGREE.

Check that the mortgage is non-recourse by having your lawyer or financial advisor do so.

Additionally, the lender never acquires ownership of the property… this is a myth that has been around since reverse mortgages first became popular in the 1990’s, but you retain control of the title.

The ease of qualification is possibly the biggest advantage… there are no income or credit checks.

But applying for and getting a loan is not always a bed of roses… there are potential pitfalls and disadvantages that you must be aware…

The first one has nothing to do with the loan specifically… but a lot of people don’t handle large sums of money well. Considering that, you most likely wouldn’t require the reverse mortgage in the first place if you did.

The question of whether they have the financial know-how to live off of the equity of their home in a retirement that could last for 20 years or more must therefore be raised given that more people are obtaining reverse mortgages at younger ages than ever before.

I’m not saying it can’t be done; I’m just saying you need to consider your situation and whether you can support yourself in retirement for at least 20 years.

Next, there is a chance that the borrower will be mistreated by family members or financial advisers who do not have the borrower’s best interests in mind. Though this does tend to be lessened by the required counseling session, it is still something to be aware of.

Additionally, given the amount you are borrowing, this can be a VERY expensive method of borrowing money… and the reverse mortgage may be more expensive than obtaining a conventional mortgage.

Additionally, some of the reasons for taking out the loan, such as home improvements, will be more expensive than other options for financial support or government assistance that may be available to needy seniors.

Overall, if you are informed before you sign anything, a reverse mortgage CAN be a good financial tool.