The Risks and Rewards of Reverse Mortgages

With many seniors citizens falling short when it comes to retirement income, reverse mortgages can seem appealing. However, Vern Hayden, founder and manager of the money management firm Hayden Wealth Management, advises seniors to proceed with caution.

The controversial and widely advertised loans allow homeowners over age 62 to take equity out of their homes to spend on their retirement. The loan, plus interest, is paid back after the home is sold or the borrower dies.

“People have to keep in mind that there’s two kind of debt—constructive and destructive,” Hayden told “Nightly Business Report.” “Reverse mortgages have the potential for being each of these.”

He warned that borrowers should not use the reverse mortgage as an ATM or credit card, drawing out money whenever they want.

(Read More: Reverse Mortgages Backfiring on Some Seniors)

However, it may be constructive for people who carefully plan how the money will be used to supplement their retirement income.

For many, that income appears to be far below the level suggested by financial planners. Americans over age 65 have incomes that are just 57 percent of those ages 45-64, according to a survey by the financial information website Interest.com, which is owned by BankRate.com. Experts say retirees need about 70 percent to 80 percent of their pre-retirement income to live a comfortable lifestyle.

Hayden said anyone considering a reverse mortgage should abide by the maxim “short-term decisions have long-range consequences.”

First, both spouses should be on the deed to the house and on the loan.

“People need to be careful about who is the borrower on this debt because if it is a husband and wife and only one of them becomes the borrower and that person dies, the loan has to be immediately paid off and that could leave the remaining spouse hanging out there without anything but Social Security,” he said.

Borrowers should also be aware of the fees involved, which can vary depending on where they get the loan, and the interest rate, which can range from 5 to 7 percent, or higher.

(Read More: This ‘Last Resort’ Could Help Pay for Long-Term Care: Financial Planner)

When looking into a reverse mortgage, seniors should find one that is federally insured, Hayden said. They should also consult with a financial planner before committing to a loan.

However, he cautioned that reverse mortgages should be used as a last resort, particularly for those on the younger side.

“They still need to do everything possible before using the reverse mortgage at that stage of the game,” Hayden said. “And they should be working with somebody that will help them plan run-out scenarios. … They need some advice and some help from qualified people.”

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