I am frequently asked if a reverse mortgage, or as it's known in the UK, an equity release, is a good idea for an elder who wants to increase cash flow. Not being a financial expert, I stay pretty general in my response, and always advise people to get advice from a financial planner.
With the help of Age Partnership, a UK business that specializes in financial advice and solutions for those who are approaching retirement, I'm offering a some information here that can provide a starting point for people thinking about a reverse mortgage. Many US companies also specialize in advice for people 55 and over.
A reverse mortgage, known in the UK as equity release, is a loan available to home owners of retirement age enabling them to access a portion of their home's equity. The home owners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their lifetimes, or as a revolving line of credit. Terms may differ with the company and agreement.
Elders often want to remodel their home to accomodate their health needs or they may need funds to pay for some in-home help. Sometimes, they simply need to increase their cash flow. The money from a reverse mortgage or equity release could help them accomplish these goals.
Consider all angles before moving forward
Anyone considering a reverse mortgage should consult a fee-only financial planner. Yes, there are positive aspects to obtaining a reverse mortgage, but there are also negatives. You need to make sure that this important decision is carefully made by discussing every detail with a qualified planner.
A reverse mortgage may include substantial upfront fees and may required mortgage insurance and higher loan origination fees than traditional mortgages. However, the most important item to consider could be that qualifying for need-based government programs such as Medicaid in the US could be affected. Since you (or your elder) would have cash coming in from the reverse mortgage or equity release on the home, you may fail to qualify for government assistance. You assets or monthly income could put you over the limit.
That being said, having access to money to continue to live life the way you choose can be worth it for some people. Everyone's situation is different just as everyone's idea of what they consider a "good life" is different.
Talk to an expert financial planner before making a decision
Don’t jump into a reverse mortgage, but don't run away from one either. Talk to your financial adviser and see if he or she thinks you – in your unique situation – should take advantage of a reverse mortgage (equity release) on your home. Listen carefully and consider all angles before deciding.
Sponsored by Age Partnership, UK