Is it smart to replace your existing mortgage with a reverse mortgage loan?
The majority of seniors who get reverse mortgage loans are doing just that.
“Fifty-five percent of seniors who get a reverse mortgage are paying off a (conventional) forward mortgage,” says Stephanie Moulton, associate professor of public policy at Ohio State University, citing a recently released university report by the Michigan Retirement Research Center funded by the Social Security Administration.
Whether this is a solid strategy depends on your circumstances, your finances and your goals.
Reverse mortgage loans allow you to cash out a portion of equity and forgo payments. Credit requirements are often less stringent. They also have fees and interest (which can be higher than conventional loans), so it’s crucial to shop for the best rates and terms.
In addition, certain actions like falling behind on property taxes, property insurance or home maintenance can trigger foreclosure.
Here are three reasons to pay off traditional mortgages with funds from a reverse mortgage loan.
“For people who have assets, it’s a way of leveraging assets,” says Jill Gianola, financial planner and author of “The Young Couple’s Guide to Growing Rich Together.”
One pair of clients used a large down payment and a reverse mortgage loan as the first mortgage to buy their retirement home. “It was a good deal for them because they were preserving other assets,” Gianola says.
And those assets are earning more than the holders are paying in interest on the reverse mortgage loan, she says.
Carefully calculate the costs both ways. With a reverse mortgage loan, there are “higher fees and higher costs in many cases” than with a conventional mortgage, says Bruce McClary, spokesman for the National Foundation for Credit Counseling. “And often buyers are insulated from the costs because they’re rolled them into the mortgage.”
Gianola agrees. “Go into these things with your eyes wide open and understand what you’re giving up for what you’re getting,” she says. Also understand “that there are still responsibilities associated with the house” — like property taxes, property insurance and maintenance.
RATE SEARCH: Shop today for the best mortgage deal at Bankrate.com.
In this case, it’s not the investments the homeowner wants to protect, but the cash itself.
Some key questions: Are you staying in the home permanently? Do you want to keep a potential move in your plans? Do you have a comfortable amount of savings and income, or is tapping your equity just a temporary stopgap?
And weigh the trade-off of current gains for future ones. “If you get stuck and have to move,” you’ll have no equity left, says Michelle Singletary, author of “Spend Well, Live Rich.”
If you do proceed, it’s smart to take it slow.
“When you’re living on a limited income, taking the mortgage payment out of the mix can have a significant impact,” McClary says. “But you have to be comfortable with the terms of the reverse mortgage.”
His advice: Go through the reverse mortgage loan counseling with a neutral counselor approved by the U.S. Department of Housing and Urban Development. And, don’t make any hasty decisions.
Another smart move: Consult an unbiased financial counselor, like an elder law attorney or a certified financial planner, says Lori Trawinski, director of banking and financing for the AARP Public Policy Institute. “Someone who doesn’t benefit in any way from what you do.”