— This is the script of CNBC's news report for China's CCTV on July 22, Wednesday.
Welcome to CNBC Business Daily, I'm Qian Chen.
Your nest egg is small. Your retirement income is limited. And you're sitting on a highly appreciated asset-your home.
A reverse mortgage, which lets you convert some of that equity into cash, might just solve the problem.
Depending on your health and financial stability, however, it could also create new ones.
A reverse mortgage enables homeowners of at least 62 years of age to get a lump-sum payment, a stream of payments or a line of credit they can tap based on the amount of equity they have in the property.
The amount someone can borrow depends on the value of the home (up to a maximum of $625,500), their age and prevailing interest rates. The higher the property value, the older the borrower and the lower the interest rate, the more people can borrow.
However, some advisors say they would not recommend such plans to their clients, for a few reasons.
First of all, reverse mortgages are relatively expensive.
A reverse mortgage is limited to lower loan-to-market value ratios (50% to 65%) than traditional mortgages, which can be as high as 100% of market value.
Also, interest rates on a reverse mortgage vary by lender, but are generally higher.
Borrowers must also pay an annual mortgage insurance premium, which adds another 1.25 percent.
Secondly, there are no restrictions on how the funds may be used, and many seniors opt to pay off unexpected medical bills or renovate their home so they can age in place.
Grafton Willey, managing director at CBIZ MHM, said, "I've also seen people outlive their ability to take any more equity out of their home and then they're forced to make tough decisions."
Indeed, cash-strapped seniors who spend all their available equity and later fall behind on property taxes and homeowner's insurance, he said, must sell their home and downsize, go back to work if they're able, or face foreclosure.
For lenders, however, reverse mortgages can be risky as well.
During the 2008 financial crisis, the reverse mortgage marketplace went through a rollercoaster - reverse mortgage loan volume fell dramatically, with major banks becoming unwilling to provide such loans due to overall real estate devaluation.
Although more popular retirement plans, such as 401(k) and retirement insurances, are available in the US, nearly half of Americans are worried about their ability to live comfortably in retirement, according to a survey conducted by the Employee Benefits Research Institute.
Yet not all advisors are down on reverse mortgages. John Salter, a CFP and wealth manager with registered investment advisor Evensky & Katz Wealth Management, thinks that everyone should at least be considering them as part of their retirement planning.
CNBC's Qian Chen, reporting from Singapore.
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