I like to consider reverse mortgages as a "late life trump card" for veteran retirees, say in their 80s, who are intent on staying in their home for the duration, but could use a boost in income. Certainly there are other situations where they can work well, but the permanence of a reverse mortgage should not be taken lightly. Too many things can happen during a long retirement, and the equity in your home is like an insurance policy. Tapping into a reverse mortgage is like cashing in a life insurance policy. Furthermore, would-be reverse mortgagors are chagrined at the rather paltry payouts from a reverse mortgage. After all, the mortgage company holds the reins and wants to profit from the deal even if you live into the 22nd century.
Three additional considerations. First, if a reverse mortgage is in your future, timing the transaction can help, because the lower interest rates are at the time you take it out, the higher the payment(s) you will receive. Second, as with any other financial product, be sure to shop around for the best reverse mortgage deal. Finally, be particularly wary of anyone who encourages you (or your parents) to take out a reverse mortgage to purchase an investment product, like an annuity.
The reverse mortgage industry is still evolving. Currently, there are five common ways to tap into home equity with a reverse mortgage.
- Tenure. Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. This is usually the most prudent alternative. If you need a reverse mortgage to help pay bills and those bills will continue for the rest of your life, you should opt for lifetime payments.
- Term. Equal monthly payments for a fixed period of months. Attractive because the monthly payments are higher than a lifetime benefit, but dangerous unless your needs for the extra money are absolutely, positively temporary, for example if you fully intend to sell the house at the end of the term.
- Line of credit. Unscheduled payments or in installments, at times and amounts of borrower's choosing until the line of credit is exhausted. Sounds great. It's like a home equity credit line that you never have to make payments on. But only the most financially disciplined retirees should take the risk of a credit line, because if the credit line is exhausted, the only feasible way to get access to additional home equity, if any, is to sell the house and pay off the reverse mortgage obligation – perhaps at an age when a move would be highly disruptive.
- Modified tenure. Combination of line of credit with monthly payment for as long as the borrower remains in the home. This option results in a lower monthly payment than a straight lifetime payment reverse mortgage, but could be preferable in unusual situations where monthly income requirements can be met with a lower payment and the line of credit can be used for financial emergencies.
- Modified. Combination of line of credit with monthly payments for a fixed period of months selected by the borrower. This combination is only appropriate under very unique situations where the borrower knows that the need for additional monthly income is temporary.