Below is an excerpt from a Wall Street Journal article which explains some of the benefits, and pitfalls of reverse mortgages. Although a reverse mortgage will only be useful to a percentage of retirees, it can be a saving grace to those who need it.
A reverse mortgage is a type of loan taken against equity in a home, available to borrowers who are at least 62. It requires no monthly payments, with interest charges instead added to the loan balance and paid only after the homeowner sells or dies. The loan can be taken as a lump sum or as monthly income, or as a line of credit, with no interest charges on unused amounts.
“Research has shown that setting up a line of credit as soon as possible, age 62, in order to let it grow and only tapping into the line of credit when needed can substantially improve the long-term sustainability of a retirement-income portfolio, meaning you can make your money last longer,” says Jamie Hopkins, associate professor of taxation at the American College of Financial Services.
The chief downside: Sums taken through any reverse mortgage, including any amount actually borrowed through a line of credit, reduce the equity available for other purposes—like moving to another home or buying into an assisted-care facility—or for the homeowner’s heirs. Also, the fees to set up a reverse mortgage can be steep—roughly $9,000, for instance, for a line of credit of about $200,000 in the example below—and erode the equity in the home if they are financed through the credit line.
“It may not be best for a short-term play” because of the time it will take for the growth of the credit line to offset the fees, “or if one wishes to leave a home free and clear [of debt] to their heirs,” says Steven Klein, reverse-mortgage director with AmCap Mortgage, in Greenville, S.C
"A reverse-mortgage line of credit can be a saving grace for the baby boomers who simply do not have enough retirement savings” if home equity is ignored, Prof. Hopkins says. “If home equity is incorporated more strategically in the future, we will see vast improvements in the financial security of retirees.”
To read the full WSJ article click here.