Apart from being a financial product, a reverse mortgage can be a lot of things. For some, it can be a tool to propel their finances and grow their line of credit. Others use it as a means to make large purchases, such as a new home, a second car, or a recreational vehicle. But for most people, a reverse mortgage is a saving grace, freeing them from long-standing debt and, at the same time, increasing their limited retirement income.
To better understand what a reverse mortgage can do for you, let’s first define what a reverse mortgage is and what its potential benefits are.
What is a reverse mortgage?
A reverse mortgage is a type of home equity loan that gives you access to your home equity while eliminating your succeeding mortgage payments. Unlike a typical home equity loan, the balance of a reverse mortgage does not become due until the last remaining borrower dies, moves away permanently, or sells the home.
However, a reverse mortgage has certain qualifications that make it unique from other home loans. For one, a homeowner must be at least 62 years old to qualify for the loan. They must also have built substantial equity in their home (different types of mortgages have varying equity requirements). For example, lenders typically look for at least 50% home equity when it comes to Home Equity Conversion Mortgages (HECMs). A borrower must also be using the mortgaged property as their principal residence.
Instead of paying the mortgage, a reverse mortgage will pay you, so to speak. However, borrowers must comply with certain loan obligations, such as paying homeowner’s insurance, property taxes, and home maintenance to prevent the loan from becoming due. In addition to that, borrowers must also not move away from the home for more than 12 months.
Reverse mortgage proceeds have different methods of disbursement. You can choose to receive your funds through a lump sum, a term payment plan, a tenured payment plan, a line of credit, or modified versions of term and payment plans. The proceeds from a reverse mortgage are tax-free which means you get to enjoy your funds entirely.
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What can a reverse mortgage do for you?
A reverse mortgage can help you accomplish a lot of things. For the majority of borrowers, taking out a reverse mortgage helps them budget their retirement income, which is often very limited as it is. For others, a reverse mortgage can help them solve huge financial problems aside from a lack of cash.
To help you grasp just how significant of an impact a reverse mortgage can make on your life, here are some of the most common ways with which borrowers use their reverse mortgage proceeds:
Medical expenses
In the U.S., a single medical bill can easily put you in the red. It is a long-standing problem that has never really gained a solid solution over the years; although the government is continuing efforts to make healthcare more accessible for all Americans. However, even with insurance, out-of-pocket expenses can be a gargantuan heap on top of the average citizen’s basic needs.
Large medical expenses are just one of the many problems that a reverse mortgage can help alleviate, especially if you have little to no health insurance coverage. For example, if you have outstanding medical debt, you can choose to receive your funds through a lump sum and pay off your bills all at once. On the other hand, if you have revolving expenses for things like medication or therapy, receiving your proceeds through term or tenure payments can help pay for them while you spend the rest of your retirement income on other essentials.
Growing your reverse mortgage line of credit by leaving it untouched can also help you prepare for future medical expenses as well as aging in place. The earlier you take out the loan, the more you can grow your line of credit if it remains untouched over time. To learn more about how a line of credit grows in a reverse mortgage, visit our in-depth article here.
Large outstanding debt
Aside from medical debt, you can also use reverse mortgage funds to pay for other types of debt from credit cards, personal loans, auto loans, and more. While using a loan to pay for another loan is not the most ideal reason to take out a reverse mortgage, it can definitely be a practical solution–especially for retirees who have a limited income as it is.
In turn, paying off your other debts can help improve your credit score, which makes way for other positive impacts like having lower interest on credit cards and acquiring utility services more easily.
But perhaps the most important benefit of paying off your largest debts is being able to sleep better at night, not worrying about money all that much. Peace of mind–for retirees, especially–is priceless, good mental health even more so.
No more mortgage payments
For the average person, the mortgage consumes around a third of their monthly income. The typical retiree will experience a significant drop in their income after they leave their employer. With both of these things in mind, having to keep paying the mortgage during retirement can be extremely difficult.
A reverse mortgage does not require a monthly mortgage payment, and it gives you access to your home equity instead. So, if you are struggling to pay the mortgage and everything else, borrowing against the value of your home can take a huge weight off your shoulders. You don’t have to pay the mortgage anymore, and you can use your retirement income plus reverse mortgage proceeds however you’d like. However, you still get to keep full ownership of your home and the right to live in it until you pass away, relocate, or decide to sell.
Relocation
Moving to a new home is typically brought out from want instead of need. Perhaps you want to live closer to loved ones, downsize to a smaller house, or relocate near the beach. But for some individuals, moving to a new home becomes a necessity in the sense that it can be a saving grace from, say, unsafe living conditions, dangerous neighborhoods, flood-prone areas, and other risky situations.
However, moving to a new home is not easy nor cheap, especially for retirees who cannot afford to make another down payment. Luckily, there is a type of reverse mortgage that will allow you to purchase a new home using the proceeds of the loan.
An HECM for Purchase or H4P is a type of reverse mortgage that allows borrowers to use the loan proceeds to purchase eligible properties. If you want to move to a smaller/bigger house, relocate to a specific area, or live closer to your loved ones, an H4P loan can help you secure a new home without having to make a down payment (which is the biggest hurdle in the home buying process). The general requirements stay the same, but there are certain limitations in place, such as only being able to choose eligible properties approved by the Federal Housing Administration (FHA).
Learn How You Can Get a Reverse Mortgage Today
Just like any other loan, a reverse mortgage is a major financial decision. But unlike other types of loans, a reverse mortgage provides relief without adding another pile of debt on your shoulders.
Want more program details? Download a FREE Reverse Mortgage Toolkit.
If you want to learn more about how a reverse mortgage can help you change your life, contact our reverse mortgage experts by phone at (844) 230-6679 or by email at info@southrivermtg.com.