Younger homeowners can now get a reverse mortgage: But should they?
Many older Americans experience financial stress during retirement. Those who need money may be tempted to turn to their homes as an income source, whether it means becoming landlords and collecting rental income or tapping their home equity. In fact, many seniors turn to reverse mortgages in the absence of having additional income sources to access.
A reverse mortgage is a loan backed by the equity you have in your home. Once, this borrowing option was available only to those aged 62 and older. Now, younger homeowners can access a reverse mortgage. But whether that's a wise call is a different story.
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A new product for younger property owners
Reverse Mortgage Funding, LLC (RMF) recently announced an update to its proprietary reverse mortgage product, Equity Elite. Now, borrowers aged 55 and over can apply for a reverse mortgage in certain states. All told, a good 2.7 million homeowners may now qualify for a reverse mortgage. And in some ways, that's a good thing.
Many Americans enter retirement lacking in personal savings. And since pension plans aren't as common as they once were, many future retirees risk a major income shortfall, especially if Social Security benefits are cut in the future (an option that's currently on the table based on the state of the program's finances and trust funds). For people in this boat, a reverse mortgage can be a lifeline.
But reverse mortgages are also a mixed bag. While they may be fairly easy to qualify for, since they hinge largely on home equity, there are drawbacks involved.
First, these products commonly come with hefty closing costs that eat into borrowers' proceeds. Also, while reverse mortgages do serve as an income source, they don't necessarily make homeownership affordable for seniors on a fixed income – especially in the face of rising property taxes and repair costs.
Furthermore, at the end of the day, a reverse mortgage is a loan that must be repaid. If it's not, a lender can force the sale of a home to be made whole.
If you take out a reverse mortgage and don't repay it in your lifetime, upon your passing, your lender can go after your estate to settle up. That could leave you in a situation where you're unable to pass your home along to your heirs.
A better solution?
These days, many homeowners are sitting on more equity in their properties as home values have soared to record highs on a national level. Retirees who find themselves cash-strapped may be better served applying for a HELOC, or home equity line of credit.
A HELOC can serve as an emergency fund of sorts without the commitment that comes with taking out a reverse mortgage. Granted, HELOCs come with a limited draw period (commonly five to 10 years) during which borrowers can access their funds. But they're still a solution worth pursuing for homeowners nearing or in retirement who aren't comfortable with the level of savings they've built up. And while HELOCs, like reverse mortgages, need to be repaid, they can be more affordable when considering closing costs.
While opening up reverse mortgages to younger borrowers may read like a good thing in theory, it's important to proceed with caution before taking one out. If you're interested in getting a reverse mortgage, make sure you truly understand what you're signing up for before locking yourself into a loan that may not be a good fit for you.
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