What are the benefits of doing a reverse mortgage when you retire? I don't really understand them and it seems too good to be true.
Answers | 2
The essence of a HECM is this: you are essentially tapping into the equity in your home TODAY without the need to ever pay that equity back. It is really no different than a home equity loan, except that you do not need to make payments. It also offers flexibility of payments - you could receive periodic payments (essentially like an annuity) for a term or for life, you could take a lump sum today, or you could apply and get a line of credit as a backstop if you ever need it in the future.
Yes, the cost of a HECM will be a little higher than a traditional mortgage. But over the long-term those costs may be insignificant.
So when are reverse mortgages appropriate? Here are some different times when they make sense:
1. You have more house than you can truly afford to maintain in retirement (maybe due to real estate taxes), but you want to stay in the home.
2. You want a "backstop" in case you ever want to tap your home equity, but never want to make payments again.
3. You have no need to leave your house to anyone after you pass away, and would rather tap the home equity now.
4. You want to use the equity in your home to buy life insurance to create a larger legacy for your beneficiaries.
5. You simply have no way to afford day-to-day living expenses, because you have a paid-for house, but not much cash flow.
There are other times it makes sense, but these are some of the big ones. It's important that you talk to a financial planner and/or HECM loan specialist whom you trust before making any decisions, as there are some downsides to HECM loans that you have to consider.