Homeowners who are 62 or older are sitting on a record amount of home equity, according to new figures from the National Reverse Mortgage Lenders Association.
From the first quarter of this year to the second quarter, housing wealth among those 62 and older grew by 1.8% — or $134 billion — and now totals $7.7 trillion.
All of that locked-up wealth may tempt some seniors into considering a reverse mortgage, particularly during these tough times brought on by the coronavirus pandemic.
What is a reverse mortgage?
A reverse mortgage is like the home loans we all are familiar with, but with an important twist. With this type of mortgage, you borrow money against your house and get cash every month.
Other types of reverse mortgages give you money as a lump sum or let you use the mortgage to establish a line of credit.
To get a reverse mortgage, you must be 62 or older. But is a reverse mortgage a good idea?
Advantages of reverse mortgages
Money Talks News founder Stacy Johnson says reverse mortgages can make sense for some homeowners. As he has written:
“If you’ve got a lot of equity in your house and Social Security just isn’t doing it for you, well, maybe this is a great way for you to increase your monthly income by tapping your home equity without leaving your home.”
Stacy notes that people who take out reverse mortgages generally plan to stay in their homes until they die. After a homeowner with a reverse mortgage dies, the home is sold to pay off the loan, or simply turned over to the lender.
Drawbacks of reverse mortgages
A reverse mortgage does not always make sense. That is especially true if you have heirs who would like to own your home after you die. As Stacy explains:
“Remember, the mortgage is getting bigger and bigger. When you die, or when you move to a nursing home, etc., someone will have to pay off that mortgage if you want to keep the house in the family.”
Should you get a reverse mortgage?
It can be difficult to decide whether a reverse mortgage is right for you.
Stacy recommends sitting down with an expert at a nonprofit credit counseling agency and discussing your options. Such counseling is not free — Stacy estimates it will cost between $100 and $125. However, paying that fee is a lot less costly than making a big mistake.
Additionally, counseling is required before you can close on a reverse mortgage. So, even if you decide to go ahead with a reverse mortgage, the counseling cost will not be money wasted.
If you decide a reverse mortgage is not right for you, consider any of the “10 Alternatives to a Reverse Mortgage.”