by Ben Swenson
The bills just keep coming.
As much as we would love retirement to be a time of relative economic freedom, fewer costs in one place seem to be offset by escalating expenses elsewhere. You may not be paying as much on commuting or your wardrobe, but healthcare needs mount with age, and aging in place can require costly home modifications.
Many people who are at least 62 years old and require a cushion to navigate their evolving needs turn to a financial tool called a reverse mortgage. For many older Americans, a reverse mortgage provides the opportunity to access the home equity they have been building for years. But experts caution that these financial agreements are not a cure-all for every situation.
In practical terms, a reverse mortgage is the opposite of a traditional mortgage, when a bank provides an amount of money to buy a home that the borrower pays back in regular installments. With a reverse mortgage, a bank or other financial institution gives money to a homeowner, based on the amount of equity in the home. The reverse mortgage is repaid once the homeowner moves or dies and the home is sold. There are accommodations made for spouses who bought the home together.
There are various types of reverse mortgages made for different circumstances. The most common type is a home equity conversion mortgage, which allows borrowers to access their home equity for virtually any need. The Federal Housing Administration insures these mortgages. A home equity conversion mortgage for purchase allows homeowners to utilize their home equity to buy a new residence, and this is usually good for individuals or couples who are looking to downsize.
Less common though readily available types include proprietary reverse mortgages, usually good for larger homes with higher equity, and single-purpose reverse mortgages, which are the least expensive choice, and which can only be used for one purpose identified by the lender.
Financial institutions disburse money to homeowners in three ways, according to Christina Drumm-Boyd, a certified senior advisor and president of Care Connect of Hampton Roads, a geriatric-case-management firm.
Borrowers can take a lump sum, receive regular monthly payments or access an equity line of credit, paying for needs as they arise. Drumm-Boyd says she always recommends the latter, as this option has the fewest opportunities for unintended consequences in long-term care planning.
Reverse mortgages are often a good fit for people who are making a financial plan that will allow them to age in place. The cash that a reverse mortgage frees up can allow homeowners to stay in their homes indefinitely, or at least longer, even as the costs of old age escalate. What’s more, the money is often tax-free and doesn’t affect entitlements such as Social Security or Medicare. “A reverse mortgage can make a difference for someone who wants to bring care into their home, age in place and do it safely,” Drumm-Boyd says.
But there are many reasons to tread cautiously. There are still fees associated with the process and interest accrues as it moves along. Homeowners also shoulder the costs of the home’s property tax and insurance liabilities. And the home has to be maintained in an acceptable condition. Each year, some seniors, unable to meet these liabilities, are forced to move out of their homes earlier than they had hoped.
A reverse mortgage is usually not a good fit for someone who needs a quick infusion of cash to remedy dire financial straits or whose long-term prognosis is precarious. Someone in advanced stages of a chronic health condition, for instance, should be cautious about the structure of a reverse mortgage, Drumm-Boyd says.
The good news is that counselors are readily available to help you decide whether a reverse mortgage is right. Home equity conversion mortgages require counseling by an independent agent, who can tell you if a reverse mortgage is right for you.
There’s a lot of legal jargon and a mountain of paperwork, Drumm-Boyd says, but on balance, a reverse mortgage can be an option to help the growing desire to age in place. “Most of our clients indicate that they want to stay at home for as long as they can,” she says.