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Understanding the Reverse Mortgage

There are many strategies for seniors who want to increase their postretirement income, some far

more appealing than others. One strategy that many have heard of is the reverse mortgage. While

not necessarily a “bad” strategy, it’s important that seniors understand the ins and outs of this

approach before they sign up.

What Is a Reverse Mortgage?

Essentially, a reverse mortgage is a way of transforming the equity in your property into cash

without requiring you to sell the home and move or cover an additional loan payment. When you

take part in a reverse mortgage, the lender pays you every month by converting your equity into

income and essentially buying your home gradually. This loan isn’t repaid until you sell the house

or pass away.

The Downside of Reverse Mortgages

Just as you’re charged fees when you sell your home, you are also charged fees when you do a

reverse mortgage. These fees eat away at your overall equity and can have many years of added

interest charged to them since they are rolled up into the loan and you aren’t paying for them until

you leave the house. In addition, unlike a traditional loan where you’re paying back principal over

time and gradually reducing the interest charged against the outstanding principal, with a reverse

mortgage the interest (which is often variable) keeps growing and is not tax deductible as it is with

a traditional loan.

Another thing to consider is whether you can continue to afford the other costs associated with

home ownership—which you have to continue paying while you live in the home. If maintaining

insurance, repairs, property taxes and other expenses will wipe out the reverse mortgage

payments, then it may not be worth it.

Finally, you’ll want to consider how the reverse mortgage might affect your legacy. As you deplete

the equity in your home by receiving reverse mortgage payments, you may have nothing left to

leave behind for your heirs. If leaving a substantial legacy matters to you, then you might want

either avoid doing a reverse mortgage or work with an advisor to see how life insurance planning

can be partnered with a reverse mortgage so you have both extra income and assets to leave

behind. For more information about reverse mortgages, visit the Federal Trade Commission’s

website.

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