Greg Iacurci, reporter for Investment News, recently explored reverse mortgages, a type of home equity loan for borrowers age 62 and older that allow homeowners to access part of their home equity in cash. For his story, “Advisers like reverse mortgages, but only in unique circumstances,” Iacurci interviewed John O. McManus, founding principal of McManus & Associates, who shared some words of caution.
While reverse mortgages may be an ok option for clients who plan to stay in their home indefinitely and who could use some supplemental income, McManus warned against draining one of your most valuable assets to pass down to children or other loved ones. From the article:
Further, for those looking to leave an inheritance for children, borrowers should expect not to be able to bequeath the home, John McManus, founding principal of McManus & Associates, said.
“It’s particularly destructive if you need to transfer assets down to your children, and they need the money,” Mr. McManus said, giving the examples of an indigent or special needs child, or a child living at home.
What is a reverse mortgage? Iacurci explains:
Reverse mortgages are a type of home equity loan for borrowers age 62 and older that allow homeowners to access part of their home equity in cash. The loan amount depends on home value (capped at $625,500), interest rate and age of the borrower. Unlike with traditional loans, there’s no monthly payment — rather, the principal and accrued interest come due when a borrower dies or moves.
Money can be accessed through a line of credit, monthly installments, a combination of those options, or a lump sum. Fixed interest rates are only available via a lump sum.
Advisers say that reverse mortgages can be a useful financial planning strategy, but one that should only be used in very specific circumstances. According to Iacurci, “Consensus thinking on reverse mortgages is that it’s a strategy mainly for clients who know they’ll stay in their home for the remainder of their lives.”
To read more about the pros and cons of reverse mortgages, read Iacurci’s article here.