If you and your spouse are both over 60 and your house is completely paid off, you may have considered getting a reverse mortgage to take advantage of the equity you’ve built up in your home. A reverse mortgage is a product that allows you to borrow a lump sum amount based on your house value. You do not need to make any payments, the loan and the interest is applied to the lien against your property and it’s only due when you leave the house, either through a sale or with your death.
Once the house is sold and the debt is paid, there could likely be no additional money left. With the accumulating interest, a $250,000 reverse mortgage could cost you $750,000 after 15 years. While this might work well if you have no one that you want to leave an estate to, there are better options to borrow for the equity in your property.
A Home Equity Line Of Credit (HELOC) would give you a cheaper interest rate and allow you to keep ownership of the remaining value of your house. A HELOC is simply a regular line of credit that secured by your house. You would need to make a regular interest payment, though if you absolutely needed to, you could get around that by borrowing a larger amount than what you need, and using that additional credit to pay the interest.
Even if you assume that you will live in the house until you die and you have no beneficiaries, there could be a time that you need to move. If your health forces you into a care facility, the sale of your home could leave you with no money left when you might need it the most.
Think of these scenarios if you’re contemplating a reverse mortgage. While it sounds good to get your equity paid out and not have to make regular payments, for many it could be the worst financial mistake they make.