Reverse mortgages are not a risk-free endeavor.
Many people in retirement find themselves in need of more cash.
Cash can be hard to come by after you have finished working.
Many people turn to reverse mortgages.
According to a recent Arizona Central article titled “Reverse mortgages can cause problems when spouses, heirs aren’t on board,” you should measure whether the risk is greater than the reward.
First, start by understanding the how reverse mortgages work.
They essentially allow a homeowner to tap into their home equity.
This loan does not need to be paid back until one of two events occurs.
What are they?
The first is the death of the homeowner.
The second is when the homeowner moves from the home permanently.
The borrowed amount must then be paid in full.
How can this be done?
You or a family member may pay the bill.
The property may also be sold within a time window in order to satisfy the debt.
This can put your spouse and your heirs in a tough spot.
If your spouse or heirs were expecting to live in the home and are unable to pay, they may be evicted or face other legal challenges.
This can be made worse if family members were unaware of the reverse mortgage and were not informed moving may be required.
How do you avoid this?
Tell your loved ones about the reverse mortgage and explain its implications.
Your spouse may assume he or she may continue to live in the home.
This is not to be assumed.
The federal Department of Housing and Urban Development may provide insurance for reverse mortgages and allow your spouse to remain even if not listed as a co-borrower, but this is not the outcome in all situations.
Can your heirs simply pay off the bill?
Yes, but this can leave them in trouble financially.
Should the home be in bad shape, it may require costly fixes before it can be sold.
Does this mean a reverse mortgage is never a good idea?
They can protect retirement accounts and large unrealized gains on the property.
Reverse mortgages should not entered into lightly.
Working with an experienced financial planner can help you make the best decisions for your family.
Reference: Arizona Central (June 12, 2019) “Reverse mortgages can cause problems when spouses, heirs aren’t on board”