Q: I know I could benefit from the income from a reverse mortgage, but the commitment concerns me. Once I sign up, isn't that basically like signing over my house?
A: Not quite, but it is a serious step that requires careful thought:
- Compare interest rates. You probably know about shopping for the best mortgage rates for a traditional loan, so apply the same thing to shopping for a reverse mortgage. The interest rate charged on the payments you receive will determine how quickly the equity in your home is used up.
- Check penalties for cancellation. To help keep your options open, know what the penalties would be if you cancel the arrangement and pay back the money you've received. Compare reverse mortgages with similar rates to see which has the mildest penalties.
- Consider your time frame. Be very aware of how likely you are to stay in your home given health and other circumstances. The longer you think you can do that, the more sense a reverse mortgage may make.
There are ways to get out of a reverse mortgage, such as refinancing or paying off your balance out of savings. However, with any financial arrangement, there is typically some expense associated with getting in and getting out. Also, the longer you are in a reverse mortgage, the more difficult it may be to get out.
Think of it this way. With a traditional mortgage, you pay money in return for equity. With a reverse mortgage, you receive money which you eventually pay for with the equity in your home. The more time goes by, the more of your equity has been committed, and that would make it more difficult to find the resources to substitute for that equity as payment for what you owe.
The key then, is always be looking to the future when evaluating a reverse mortgage - not just when you get into one, but then periodically throughout the years.