By Maurie Backman, The Motley Fool
Retirement can pose a host of financial challenges for seniors, particularly those whose monthly income primarily consists of Social Security. Historically, those benefits have done a poor job of keeping pace with inflation, and when we throw in rising healthcare costs, it's easy to see why so many older Americans are struggling.
But many seniors have one major asset at their disposal -- their homes. Zillow estimates that roughly 34% of owner-occupied homes in the U.S. are owned by someone 60 or older. If you're part of that statistic, it means you're sitting on a potential cash source. All you need to do is sell your home and use the proceeds of that sale to pay your living expenses.
Of course, the problem with that solution is obvious, and it's that you'll still need a place to live. But actually, there is a product that could give you immediate access to money while allowing you to stay in the home you're comfortable living in. It's called a reverse mortgage, and here’s how it works: Rather than pay a lender money every month, you get paid money based on the equity you have in your home.
You can qualify for a reverse mortgage as long as you're at least 62, use the home in question as your primary residence, and are able and willing to keep up with your homeownership costs -- meaning, continue paying your property taxes, retain homeowners insurance, and maintain your property.
Here are a few reasons why it could pay to get a reverse mortgage:
1. You need money but don't have great credit
When your credit score is solid, you have a host of borrowing opportunities at your disposal. But if your credit isn't great, borrowing affordably becomes much more challenging. If you need money and don't have the best credit score, a reverse mortgage could be a good solution, since it doesn't take that number into account. Rather, eligibility hinges on having equity in your home, and if that equity is there, you're likely to get approved.
2. You want flexibility with your money
You might assume that if you get a reverse mortgage, you can only use that money to cover your housing expenses. Not so. You can use a reverse mortgage to pay for basics like heat, food, electricity, and a host of other expenses having nothing to do with your home. You can even use that money to travel, if you so desire (though if you're in a position where you want extra money to pay for luxuries, there are better solutions than a reverse mortgage).
3. You want a loan with flexible repayment terms
People who have equity in their homes generally have the option to borrow against it. As such, if you need money, you may be eligible for a home equity loan. But when you take one out, you'll generally need to start making payments on it right away. With a reverse mortgage, you don't need to repay it until you move out of your home, sell your home, or pass away, at which point your heirs can sell your home to satisfy that obligation.
Is a reverse mortgage right for you?
Though there are several good reasons to get a reverse mortgage, one thing you should know is that there are generally expensive closing costs associated with getting one. And while a reverse mortgage could help you stay in your home throughout retirement, it won't necessarily make the cost of doing so easier to manage on a limited, fixed income.
The U.S. Census Bureau reports that only 2% to 3% of eligible seniors have a reverse mortgage. Part of that could boil down to the fact that these products are somewhat confusing, but it could also be an indication that the drawbacks of reverse mortgages outweigh the benefits. Therefore, while a reverse mortgage could be a good solution for you, make sure you understand what you're signing up for before going through with it.
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