Q: My wife and I are retired, and we have a lot of equity in our home but not much income. People tell me that's a natural fit for a reverse mortgage. What's your take on that?
A: Like most financial products, reverse mortgage loans are not inherently good nor bad; whether or not they make sense depends on the details of your financial situation. Here are some major points to consider:
- Are the tax and insurance obligations on the house burdensome? If so, be aware that you will continue to be responsible for these expenses once you get a reverse mortgage. Selling your home and finding a less expensive residence might be a more practical way to unlock your equity.
- Would you be using the loan for short-term or long-term needs? Borrowing long for short-term consumption is never a good plan.
- Do you understand that you could be accruing interest on this loan for a very long time? Unlike other mortgages, a reverse mortgage isn't designed to be paid down until you no longer own your home. If you plan on staying in your home for a very long time, your home equity would be further eroded by the interest you accrue on the full balance of your loan.
- Do you have a plan for when you can physically no longer stay in the home? Ultimately, the reasons many seniors have to give up their homes is physical rather than financial. If that happens to you, do you have a plan for paying for care if you've already spent the equity from your home?
- Have you compared competing mortgage quotes? These loans are like any other -- not all rates are the same, so shop around before you commit.
As with any loan, the best way to understand a reverse mortgage loan is to look past the immediate benefit of getting the cash, and consider whether you can live with the obligations and consequences of repayment.