Wednesday, August 18, 2010, AM | 1 Comment
For so many years, we have been watching advertisements, featuring mostly Hollywood celebrities, spreading the word of reverse mortgage. It’s not for every retiree though. Who can take advantage of it? Those who are equity-rich but cash-poor can benefit from it. They can continue to live in their homes and generate extra tax-free cash flow.
Reverse mortgage can be good depending on…
Reverse mortgage is not bad. Used sensibly, it can make your life easy and you can live in your home financially in, relatively, more comfort. It can be considered a financial lifestyle and wealth-management tool. Reverse mortgage lets homeowners convert their equity into cash without selling it or paying the debt until a pre-set time in the future.
Reverse mortgage is still a form of debt. Contrary to traditional mortgages, as time goes on, this debt increases. When you think about it, we spend most of our working lives to build equity and try to eventually pay the mortgage debt off before we are labeled retiree. As the name suggests, reverse mortgage is the opposite. You begin to lose equity continually.
One downside is that because you continuously lose equity, when you are “deleted” from the surface of the earth, reverse mortgage may deprive your heirs of capital. It should not make a big difference if you are without kids or your kids are well off and they are not looking forward to inherit big.
Any alternative to reverse mortgage?…
Yes there is. Sometimes what happens is interest, and terms and conditions can be expensive [of course you do your research], retirees may be better off with a simple line of credit from the bank:
- Interest payments may be lower
- There are no repayment penalties
- Retirees can draw against it in small increments
- It reinforces the perception that debt is being increased
By comparison, a lump sum from a reverse mortgage tends to lead to spending unnecessarily while forgetting the original source was debt.
In a Nutshell
Before resorting to reverse mortgages or lines of credit, retirees should consider whether they can really afford their lifestyle, including home ownership. Alternatives are to sell and downsize to buying a condo or renting an apartment.