Reverse Mortgages and Stability – Are Your Finances Safe?

Saving for retirement is a lifelong goal, one that many struggle to reach. According to a CNN Money survey, 30 percent of people in their 60’s have saved less than $25,000 for retirement. When the age of retirement approaches and money is tight, what are your options? Do you live on credit cards and hope for the best? While some toy with credit repair risks and others resign themselves to another 20 years in the workforce, many are looking for creative alternatives.

Home equity loans are a popular way to access income, allowing homeowners to borrow against their equity in exchange for a cash sum. For the retirement set, these loans go a step further in the form of a reverse mortgage. Available only to homeowners who are 62 or older, a reverse mortgage provides an easy source of retirement income. Unlike a traditional home equity loan, a reverse mortgage does not have to be repaid unless the owners decide to sell the home, no longer use it, or cannot meet their obligations. While this may sound great in theory, there are several drawbacks to reverse mortgage terms, including:

  • Lost money

While a reverse mortgage may be different than other home loans, the incurred fees are remarkably similar. To qualify for the loan, homeowners are expected to assume costs related to origination fees, appraisals, credit reports, home inspection, mortgage insurance, and service fees. In total, the price of securing a reverse mortgage can exceed $8,000-$10,000, taking a huge bite out of your financial resources.

  • Interest and longer loan terms

A reverse mortgage can have a dramatic effect on your original mortgage’s terms and conditions. Not only does it reset the life of the loan, any accrued interest is treated as an advance since the borrowers are not required to repay the loan in monthly installments. Therefore, interest is assessed based on the cash amount received and the interest accrued on the original loan. The result? Compounding interest that stands to eliminate years of hard-earned equity.

  • Medicaid eligibility

Receiving cash from a reverse mortgage is great—unless you rely on Medicaid. In many cases, these funds are viewed as assets, affecting your long-term eligibility. To avoid losing medical coverage, Medicaid requires you to spend your reverse mortgage funds quickly. If you don’t, they may be forced to reassess your benefits.

  • Credit

In addition to losing Medicaid benefits, your credit options could be on the line as well. Assuming a reverse mortgage means assuming another loan, one whose presence will affect your debt utilization ratio and possibly your credit score. Depending on the amount, this byproduct could limit your ability to obtain new credit cards, auto loans, and other financing. The road will also be longer if you plan to sell your home in the future. In the event of sale, the balance of the reverse mortgage is due, leaving you with depleted funds and less equity. The outcome could hinder your ability to find new mortgage financing.

  • Inheritance

Every parent hopes to leave their children with memories and security, whether it is a family home or a monetary investment. If you plan to leave Junior the house, it is important to understand how a reverse mortgage affects his inheritance. If a reverse mortgage exists on the home, the beneficiary must repay the loan before receiving ownership. If your child cannot repay the loan, he may be forced to sell the house.

The bottom line:

While retiring without funds is daunting, there are effective and safe ways to draw income. Although avoiding consumer debt is the best way to avoid credit repair, a second mortgage may not be the secure answer you are looking for. If handled poorly, a reverse mortgage can obliterate years of equity and available funds. The results could lead to foreclosure or, at best, a mountain of debt and a ruined credit score. If you are approaching retirement, talk to a financial advisor about the right path to choose. They can help you mitigate risk, avoid credit repair woes, and enjoy your Golden Years.