Sounds like the perfect setup – take out a reverse mortgage on your home, age in place and have the funds to do whatever you want. Travel, buy a convertible, even start up that consultancy. So what’s the downside?
Well, the first caution is that interest rates on reverse mortgages can be sky-high compared to other types of loans.
With a reverse mortgage, you don’t have to make any payments. You typically receive a lump sum, and then nothing needs to be done until you sell your home (either because you decide to, or as part of your estate after you die.)
So the amount you owe just keeps growing over the life of your mortgage. It will never be more than the fair market value of your home, but there likely won’t be anything left over when your mortgage or your estate is settled. And there are significant financial penalties for paying out your mortgage before the term is over.
Financial advisors recommend that borrowers look to other options if they can, such as a line of credit, or sell the home, and move to a smaller home or even rent. They say that reverse mortgages are good for people who are house-rich, but cash-poor, and who can’t make any interest payments. Other than that, it’s probably better to borrow elsewhere.