Reverse Mortgage Upsides and Downsides

As you inch closer to retirement, you may have some excitement, but you may also have some worries. In particular, you might be concerned about how retirement can impact your financial situation. After all, the loss of your weekly paycheck can be daunting, even if you think you are prepared for it.

There are a few options available to help you fund your retirement, including reverse mortgages and equity releases.

If you own your own home or have a minor mortgage, equity release may be the ideal answer for funding the retirement you’ve been dreaming about.

Releasing equity helps you to free up cash that has been tied up in your property. The Lifetime Mortgage is the most frequent type of equity release plan in the United Kingdom.

However, both options have upsides and downsides. We look at these in more detail below.

Old lady on a swing - reverse mortgage
Image by Claudia Peters from Pixabay

Upside: A Reverse Mortgage Can Replace Some Lost Income

A traditional home loan is not designed to replace the money you earned working each week. It typically pays out only once. However, you can set up a reverse mortgage to dole out funds to you month after month. Having that predictable monthly payment is almost like replacing your lost ongoing income you made when working, at least temporarily.

Downside: It Does Not Last Forever

One of the downsides of setting up a reverse mortgage to pay you monthly is those payments do not continue indefinitely. Among the possible downsides of reverse mortgages is the fact you can only borrow up to the total available amount. Therefore, one day you will stop receiving those checks. You must plan ahead for that eventuality to make sure you will stay financially stable after those payments stop.

Upside: Your Loan Period is Longer with a Reverse Mortgage

A loan period is simply how long you have to pay back a loan. A traditional home mortgage often has a loan period of five years or less. A reverse mortgage has an indefinite loan period. That period is defined primarily by how long you remain in the home. The agreement requires you to use it as your primary residence. If you stop doing so, the balance is owed. Therefore, your reverse mortgage period can be much longer and allow you more years of retirement comfort.

Downside: A Longer Loan Period Means More Interest

As you probably know, most loans require payment of interest. A home loan is no exception. Both traditional and reverse mortgages require you to pay interest. The difference is a reverse mortgage lasts much longer. Therefore, there is much more interest to eventually pay.

Upside: You Mostly Choose How to Spend Reverse Mortgage Money

Old couple sitting on a bench, looking out to sea
Image by lecreusois from Pixabay

Another upside of a reverse mortgage is there is very little restriction regarding how you can spend the funds. You can use them for necessary purposes like paying for medical care. However, you can also opt to use them to go on trips or otherwise make your retirement more fun. The choice is entirely yours.

Downside: There Are Initial Fees to Deal With

The amount of money you can potentially borrow with a reverse mortgage is affected by certain upfront processing fees. Those fees are deducted before funds are issued to you, typically. If you happen to already have an active traditional home loan, you are also obligated to immediately pay its balance with some of the reverse mortgage funds. Therefore, the total you actually receive free and clear may not be what you first expect to receive.

Big Picture: You Have to Consider Your Priorities

As you can see, arguments can be made both for and against reverse mortgages. Base your own decision on your personal priorities. For example, if you intend to move in the near future, a reverse mortgage is not right for you. However, if you have no plans to move and want to supplement your income with no immediate financial strain, it could be the perfect answer.

This is a collaborative post

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.