Dear Penny: I’m 65 and Times are Tight. Should I Get a Reverse Mortgage?
I am a 65-year-old, semi-retired single female. Because of my personal and financial situation at the time, I started collecting my Social Security. I needed it to supplement my part-time income in order to just live. It’s not much — under $600.
The problem is, the family-owned business I have worked at for a very long time is in danger of closing. To complicate matters, I live quite a distance from any city large enough to find more part-time work.
I have very little savings but own my home. Would a reverse mortgage work for me? Any other suggestions?
-N.
Dear N.,
Tom Selleck makes it sound so simple in those AAG commercials where he touts reverse mortgages as a way for seniors to have a secure retirement while staying in the homes they love.
Of course, it’s safe to assume that Selleck — whose estimated net worth is $45 million — isn’t in need of the product he’s shilling. But it’s easy to understand the appeal of a reverse mortgage for average senior citizens.
Consider that about 48% of households headed by someone age 55 or older had nothing saved for retirement, according to a 2019 report from the U.S. Government Accountability Office. But about 82% of people age 65 and up own a home.
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That means there’s a good chance many seniors will use their home equity to fund at least part of their retirement with a reverse mortgage. But there are some risks you need to be aware of before you pursue one.
First the basics on reverse mortgages: They’re available to homeowners age 62 and older who own their homes outright or have significant equity.
With a regular loan, you’d make regular payments to the lender, but with a reverse mortgage, your lender makes payments to you. They can come in the form of a lump sum, monthly payment, line of credit or a combination.
Interest is tacked onto your loan balance, which isn’t due until you die, sell the home or move out.
As you receive payments, your equity drops. That might not sound like a big deal now, especially if you plan to stay in your home for many years. But since you’re only 65 — meaning you can expect to live another 21 years on average — you need to consider the impact of reducing your equity should you need to sell your home at some point.
You’re still responsible for property taxes, home insurance and any homeowner association fees. Fall behind on these, and your lender could foreclose on you. That’s a real concern I have for you should your income drop significantly.
You’ll also pay hefty fees to get a reverse mortgage, including closing costs, a 2% mortgage insurance premium up front and a loan origination fee of $2,500 or 2% of the first $200,000 of the home’s appraised value, plus 1% of its additional value.
If you decide the risks and costs of a reverse mortgage aren’t worth it, you could try to sell your home and downsize to a cheaper one.
But if you decide to pursue a reverse mortgage, try to wait as long as possible. Generally, the older you are when you take out a reverse mortgage, the higher your payout will be.
This may sound impossible given that your employment prospects are shaky where you live. But a growing number of companies have work-from-home jobs that could let you earn income without moving. (Shameless self plug: The Penny Hoarder regularly posts remote job opportunities available throughout the U.S.) Another option would be to stay put and take on a renter to generate additional income.
If you proceed with a reverse mortgage, you’ll have to meet with a HUD-approved counselor first, and when you do so, take full advantage. The world of reverse mortgages is filled with incredibly confusing terms and conditions and misleading claims. So be sure you fully understand all the details before you sign anything since we’re talking about your most valuable asset.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.
