13 May Should I take a reverse mortgage?

Q. I’m on a fixed income and money is tight. I own my home without a mortgage but I’m not sure if I should use it for my expenses. Should I consider a reverse mortgage?
— Worried senior

A. Taking a reverse mortgage to fund your living expenses in retirement is not a decision you should take lightly.

Your decision could change the course of your finances for the rest of your life.

A reverse mortgage is a type of mortgage that allows you to take out the equity of your home over time either as a payment, lump sum or line of credit, said Bryan Smalley, a certified financial planner with RegentAtlantic in Morristown.

The size of the payment is based on the homeowner’s age and value of the home, he said.

“Unlike a traditional forward mortgage where you send principal and interest payments to the bank to build your equity over time, with a reverse mortgage, the bank sends you payments over time which reduces your equity and builds up the debt you owe on the home,” Smalley said.

No payments are owed to the bank until you move, sell the home or pass away. At one of these events, the bank gets paid what is owed to them by selling the property and taking back what is owed, Smalley said.

Anything above that amount goes on to the home’s owner or their heirs.

Similar to a traditional forward mortgage, in setting up a reverse mortgage, there are closing costs and interest accrues over the course of the loan.

Smalley said these costs tend to be higher for a reverse mortgage and are often included in the mortgage note and accrue interest. That means it’s important to shop around and price compare the costs of a reverse mortgage.

The most common type of reverse mortgages are Home Equity Conversion Mortgages (HECM) which are provided by private banks and insured by the Federal Housing Administration, Smalley said.

He said to secure this type of reverse mortgage, one must be at least age 62, own their home outright, use the home as their primary residence and not owe any debt to the federal government. The person taking out the mortgage must also be able to service their other housing related expenses such as property taxes and insurance costs. All applicants are required to attend a consumer information session with an approved counselor.

Before you take out a reverse mortgage, Smalley said you should consider your alternative options to tapping into the equity of your home to fund your living needs.

One option is a home equity loan, which is a loan out against the equity in your home.

“Interest has to be paid on this loan no matter if you are using the money or not but the home remains the asset of the owner,” Smalley said.

Then there’s a home equity line of credit (HELOC), which allows you to borrow against your home equity to the degree you need the funds, meaning you are only paying interest on the amount borrowed.

The interest rate on the HELOC is typically a variable rate which can go up in a rising interest rate environment, Smalley said.

If borrowing against the equity in your home does not seem attractive to you, you always have the alternative of selling your home and either downsizing or deciding to rent, Smalley said.

“Downsizing allows you to access the equity in your home without then having to pay interest on it and it keeps a roof over your head that you own,” he said. “Renting allows you to take out the full equity in your home and use it to live on and it may help you lower your living expenses by eliminating some of the costs such as property taxes.”

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This post was first published in May 2016.