Guaranteed income is just that; income guaranteed for life with no risk on your part. A reverse mortgage can provide that level of security. So why don’t more people use them?
Two reasons: fear and fees.
Fear Of A Reverse Mortgage
First, let’s address the fear factor. It seems a lot of people still believe that when you take out a reverse mortgage you run the risk that the bank can take your home. Long ago, this was true, but FHA put regulations in place in 1993 that changed all of that.
Here’s the truth about reverse mortgages and the guaranteed income they can provide:
- You always retain title of your home.
- If your home value goes down, and because of the reverse mortgage, you owe more than your home is worth, then the bank is out of luck and upon the eventual sale of your home, they have to eat the difference. (Actually, since reverse mortgages are an FHA product, the government is insuring the bank against this kind of loss.)
- If you choose a reverse mortgage option that guarantees you monthly income for life, you can never be kicked out of your home as long as you are still living there, even if they end up paying you far more than your home is worth. (You are responsible for paying taxes and maintaining the home in a reasonable condition though.)
Fees In A Reverse Mortgage
Next, let’s address the fee factor.
Once again, long ago, fees used to be outrageous and it was difficult to see exactly who was charging what.
Today, the industry is highly regulated and fees are capped. You can expect to pay about 5% of the appraised value of your home in fees, which, although not cheap, isn’t too bad considering you would be provided guaranteed income for life, with the government taking on the risk that you would live a long, long time and end up borrowing more than the value of your home.
The truth is, in the right situation, a reverse mortgage can provide a risk-free stable source of guaranteed income, or can be used to pay off an existing mortgage, freeing up monthly cash flow.