There are three general categories of borrowers, which you will more than likely fall into. These categories include borrowers who are well-funded, financially constrained or underfunded. Each of these borrowers have different reasons to consider getting a reverse mortgage. For some, it is more of an insurance policy. For others, it is a lifeline for cash flow. Here are the three types of borrowers explained in more detail:
The Well-Funded Borrower
This type of borrower has sufficient assets for retirement spending and are very strong financially. Even though these borrowers will more than likely never have a need for a reverse mortgage, they should consider one as an insurance policy against unforeseen risks such as assisted care, divorce,
drastic drops in the financial markets and falling home prices. It can be another source of funds and can create an additional layer of financial security during retirement.
The Financially Constrained Borrower
This type of borrower has “just enough” or “not quite enough” for retirement spending. These borrowers are fairly strong financially and they have retirement assets, but their overall success rates in their
financial plans are lower. Although these borrowers may or may not need a reverse mortgage to live comfortably during retirement, they should be working with their financial advisor to see how a reverse mortgage can be implemented in their overall financial plan.
At the very least, a line of credit should be considered as an optional contingency plan. It can also ensure that funds are available when budget breakers arise. It can also increase cash flow by paying off current mortgages and other debts, bringing peace of mind.
The Underfunded Borrower
This type of borrower typically have little to no assets other than their home. A reverse mortgage is often implemented in order for them to remain in the home, to help improve their standard of living, to help meet basic living needs and provide access to funds when large expenses arise.
Whichever of the three types of borrowers you fall under, there are plenty of reasons to get a reverse mortgage. Some of those good reasons include financial planning, purchasing a new home, paying off debt, paying for in-home care, getting rid of mortgage payments,foreclosure bailout, creating cash flow, improving or remodeling a home,helping family and more. I will cover these more in depth later in the book.
There are also plenty of reasons not to get a reverse mortgage.
When a Reverse Mortgage is NOT the right Fit?
There are situations where the reverse mortgage may sound like the answer to your prayers. It’s important, however, to look at the entire situation. Getting rid of the mortgage payment may sound fantastic , but there are some scenarios where you might consider options other than a reverse mortgage.
Here are some things to consider:
Short Term Cash Needs
If the reason you are wanting to get a reverse mortgage is to access cash for short term needs, it’s probably not the right choice. There are plenty of other options that cost less which can help you get through a cash pinch. If the reverse mortgage does not solve both short-term and long-term problems, you should consider other alternatives.
Risk vs. Financial Benefit
As a borrower, you will need to determine how much value a reverse mortgage is going to provide to you. The question you need to answer is whether the costs and risks are worth the benefits. If it does not provide a significant financial benefit when all is said and done, it’s probably not the right choice.
Will You Be Moving Again?
The reverse mortgage was designed as a way for seniors to age in place. The expectation was that this would more than likely be your last home and therefore provide you a resource for the long haul. If you are planning on moving or selling the home, you may want to think twice about getting a reverse mortgage.
If you have a problem with managing your money, whether it’s bad spending habits, living outside your means, addictions or failure to create and stick to a budget, then a reverse mortgage is probably a poor choice. Having access to tens of thousands, or even hundreds of thousands of dollars as a result of getting a reverse mortgage could prove too tempting and provide a false sense of security.
Are there other people living in the home besides you and your spouse? (For example, if you have a handicapped child or relative living with you.) What will happen to them once you both have permanently left the home and the loan becomes due? Plans need to made. If plans cannot be made, you may want to reconsider pursuing the reverse mortgage.
Understand the Pros and Cons
Do not get sold on a bill of goods. It is important to have a firm understanding of how the reverse mortgage works. Examine all the pros and cons and understand what is required of you. Spend as much time asking questions as you need. Request as much information as you can. Ask for various scenarios to be created. You need to be informed, educated and empowered.
Getting a reverse mortgage is a big decision not to be taken lightly. You can always get friends, family and other trusted advisors’ input as to whether a reverse mortgage makes sense given your current situation. However, do keep in mind that family, friends and advisors may know less than you and harbor biased unfounded opinions about reverse mortgages.