New rules could make reverse mortgages safer. Should you shore up your retirement with one?
The reverse mortgage has long been viewed as a last resort for older Americans with home equity but little cash. Now it's poised to become a mainstream financial strategy -- at least that's what regulators and financial services firms are hoping. But you should be cautious about jumping in.
First, the basics: A reverse mortgage lets you borrow against your home equity once you hit 62. The loan, which can be taken as a lump sum, lifetime payments, or a line of credit, doesn't have to be repaid until you move or die.
Unfortunately, these mortgages have been riddled with problems -- in particular, misleading marketing and inappropriate lending, a 2012 Consumer Financial Protection Bureau report found.
In response, new federal rules recently went into effect. The reforms generally reduce how much of your home's value you can borrow, among other things, and require lenders to make sure that borrowers can cover upkeep.
Financial services companies are also aiming to make these loans more appealing. "Home equity is key to Americans' retirement security, so it's crucial to responsibly offer reverse mortgages," says Christopher Mayer, a Columbia Business School professor and CEO of Longbridge Financial, a startup reverse-mortgage lender that plans to provide broader financial advice too. Boston College professor and retirement security advocate Alicia Munnell is on its board.
Some advisers are touting reverse mortgages as standby credit. Unlike home-equity lines of credit, which can be frozen during a financial crisis, reverse mortgages stay open. Left untapped, your credit line will grow each year by the interest rate you can be charged. "It's a great way to build a hedge against future needs," says Coral Gables, Fla., financial planner Harold Evensky, who co-authored a recent study on these loans.
Given the stakes involved, though, you need to approach a reverse mortgage carefully. Here's how:
Weigh the costs.
On a $500,000 home, you might pay $2,500 for mortgage insurance, $3,000 in closing costs, and a $6,000 origination fee, says Edinboro University associate finance professor Shaun Pfeiffer, who co-authored the Evensky study.
The steep upfront costs are all the more reason to take a hard look at your other resources, says Minneapolis financial planner Jonathan Guyton. Do you have a cash-value life insurance policy to tap? Could you trim your spending?
You'll have to pony up these closing fees even for a line of credit you haven't used. In that case, is the peace of mind in knowing that you have a sure source of cash and don't have to sell when stocks fall worth that five-figure sum?
Be sure you're staying put.
A reverse mortgage makes sense only if you plan to remain in your home for years. Think about how easy it will be to do so as you age and whether you'll want to move closer to your grandkids.
A reverse mortgage may no longer be a last resort, but it's still a tough call.