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Reverse mortgages are becoming more popular among baby boomers: Between 2012 and 2013, there was a 20% increase in the number of loans. A recent MarketWatch article ("Is a reverse mortgage a good retirement strategy?" December 2014) explains how a reverse mortgage works—while also identifying its drawbacks.

 

You must be at least 62 years of age and either fully own your home or only have a small mortgage balance to qualify for a reverse mortgage. These mortgages allow you to borrow money against the equity in your home. The bank then pays you each month, instead of the other way around. The money can also be received as a lump sum or a line of credit and has to be repaid when the home is sold, or when you move out or die.

 

The main benefit of a reverse mortgage is the ability to convert the equity in your home into cash while still living there, thus giving you another way to help fund your retirement. You need not be employed—or even have good credit—to be approved for the loan. The drawbacks, however, can be numerous:

 

  • Fees—origination and service fees, a mortgage insurance premium and closing costs—tend to be high.
  • Your home cannot be passed on to heirs after your death unless they can repay the balance owed on the mortgage.
  • If you move out of the house—including into a retirement facility—and have not lived in the house for more than 12 months, you must repay the loan.
  • You are still responsible for property taxes, insurance and other expenses. Failure to pay these expenses could mean losing your home.

 

A recent CNBC article ("Experts cautiously optimistic about reverse mortgages," November 2014) contends that although they are not for everyone, a reverse mortgage can be beneficial for the right person:

 

  • Reverse mortgages can be helpful for homeowners who have a lot of equity in their home, plan to stay in it and need more income to maintain their lifestyles.
  • If your portfolio takes a serious hit, it can be used as a line of credit to cover living expenses in retirement.
  • Use it to tap into the equity of your home if you are not planning to leave it to your heirs.

 

There are more safeguards today than in the past. Rules are stricter to help ensure that borrowers avoid foreclosure and have enough income for upkeep of the home, as well as taxes and insurance. Borrowers are also unable to take more than 60 percent of a lump sum in the first year of the loan.

 

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Would you ever consider a reverse mortgage?