NEW YORK (MainStreet) — Reverse mortgages are all over today. For people who didn't save enough to keep themselves in their lifestyle after retirement, they provide a valuable tool for closing the gap between needs and income. But are they for everyone? And what do you need to know before you leap into one? We spoke to leading experts in the financial world to find out what you need to know to get the most out of a reverse mortgage without being taken advantage of.
How a Reverse Mortgage Works
Leslie Bocskor, managing partner at Electrum Partners in Las Vegas, explains that reverse mortgages are more or less exactly what they sound like. "Instead of making payments, you take money out of the equity of your home," he said. The amount you owe on the home increases on a weekly basis, based on interest rates. "It's an end-of-life financial instrument," he explains. "The lender has to say how long this person will be alive. Are we going to lend them money and be forced to evict them later? That's obviously not what they want."
Who Is a Reverse Mortgage For?
Bocskor says that reverse mortgages are for people who have equity in their homes, are at the end of their lives and don't have enough income. The equity they take out can replace the income they don't have. That's going to reduce your estate but allow for a better quality of life while the person is still alive. "You can turn equity into usable liquid assets," he says. "You take money out without worrying about making payments."
On the other hand, Bocskor says, you shouldn't consider a reverse mortgage if you're on the younger end of the retirement spectrum. "If you're going to live another 30 years, you're going to find yourself getting evicted from your home," Bocskor says. No one wants that outcome, but it is a possibility. "The bank doesn't look at your ability to make payments in the future," he says.
The Rules of the Reverse Mortgage...
Marga Garza, a reverse mortgage counselor with Take Charge America, says that "you always have to consider what would happen if you sell the house." After all, you might get more cash out. What's more, you can sell the house, take your equity and buy a significantly less expensive place to live, possibly in a different market. Even when you do get a reverse mortgage, you still have to pay taxes, insurance and maintenance costs on the property -- and it's very difficult to move out.
Garza points out that you have to be at least 62 years old to get a reverse mortgage, and you need equity. "The personal question is how much you want to leave to your heirs," she says. "Is the goal to leave your house free and clear? If you want to leave more behind, this isn't a good idea, because the balance would increase rather than decrease." Ultimately, that's a personal decision, but it's one that you need to make before you go any further, "unless you're strapped for cash, because you lost money in the stock market," says Garza.
How to Find the Right Product...
Bocskor says that, when it comes to a reverse mortgage, "it's all about the terms of the note." You want to look at interest rates, compounding and how fast you're accruing additional debt. Furthermore, while there are often traditional financing costs, most institutions worth going to will allow you to backend those costs. "If you get favorable terms, you can get [the reverse mortgage] with little or no costs up front," Bocskor says.
Garza says that, broadly speaking, the product is safe. "Right now, there's a financial assessment made to make sure the client can maintain the expenses of the house," she says. "If the money they're getting from reverse mortgage and other sources isn't enough to maintain the house, they don't meet the requirements."
Everyone in the process, of course, has to be certified. What's more, the government insures the home. "There are very strict caps on interest rates," Garza says. "If you're underwater, the client never has to pay more than what the home is worth."
Another way to think about it: the government doesn't own your house. "They're putting a second lien against it," Garza says. "As long as it's your primary residence, you pay taxes and insurance and maintain the home, it's yours. It's like a dome that protects you."
"These are a great financial tool that provide people with real value," says Bocskor. "The important thing is that you need to stay away from unsavory characters who are too aggressive."