Thanks to aging baby boomers, reverse mortgages are growing in popularity. However, just because they are popular does not automatically make them the right type of strategy to fuel your retirement. Reverse mortgage loans are tricky with a lengthy list of pros and cons that borrowers need to fully consider first.
If you are contemplating using a reverse mortgage to help fund your retirement, the American Association of Retired Persons (AARP) recommends asking yourself a few questions to ensure that you use your reverse mortgage wisely. They encourage borrowers to contemplate the following:
- Do you really need a reverse mortgage? They are typically costly and may not be the west way to borrow money to finance your dream.
- Can you afford a reverse mortgage? Since the amount due grows larger every month because of compound interest, they are very expensive to pay off.
- Can you afford to start using up your home equity now? If you begin to spend it now, you’ll have less for future expenses or emergencies.
- Do you have less costly options? AARP suggests using home equity loan or home equity line of credit as they cost less.
- Do you fully understand how these loans work? These are unique loans and the risks associated with them are unlike others.
Reverse mortgages typically have higher mortgage interest rates than traditional, 30-year fixed rate mortgages and it is the goal of the AARP to encourage people to think ahead to prevent complications down the road. It’s important to answer the above questions affirmatively before you commit to a reverse mortgage.
Buying a new sports car or a second home are not wise uses of your reverse mortgage loan. The money obtained from a reverse mortgage should really be used for retirement purposes only.
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