As the cost of living rises across the United States, more retirees are utilizing a reverse mortgage to meet their financial goals. A reverse mortgage can become a powerful tool for homeowners when properly utilized. They can help people build lines of credit over time. They can finance large expenses, such as unplanned medical costs, that one would have no way to pay otherwise. Most importantly, they protect seniors from financial dependence on their family members–A real concern for many retirees in 2022.
How Does a Reverse Mortgage Work?
A reverse mortgage is a type of loan product that allows you to borrow against the value of your home. In other words, it allows you to access the home equity that you have built up so far. Unlike other home equity loans, a reverse mortgage does not require mortgage payments, and the loan does not become due until you die, move away permanently, sell the home, or fail to keep up with loan requirements.
To qualify for many types of reverse mortgages, you have to be at least 62 years old, be a principal owner of the house, have 50% or more in home equity, and have the mortgaged property as your primary residence.
When you take out a reverse mortgage, you keep full ownership of the home. You can make repayments on the mortgage if you want (or pay the interest that the loan has accrued), but it is not required. When it comes to the loan proceeds, you can receive your funds through:
- A lump sum
- A line of credit
- Term payments
- Tenure payments
When the balance becomes due, the lender will sell the home to pay off the balance. Alternatively, your heirs can pay off the loan or refinance the mortgage to keep the property.
Discover what a reverse mortgage can do for you. Click here to Get Started.
Why Getting a Reverse Mortgage Is a Smarter Choice Than You Think
Why is getting a reverse mortgage a smarter choice than you think? The correct answer depends on the person you’re asking. Each borrower has a different set of goals.
For example, if your goal is to remain financially independent but your retirement income is limited, taking out a reverse mortgage may be more sustainable than selling other assets. Or if your goal is to finance travel after you retire, you can use a reverse mortgage line of credit to pay for your trips without having to pay them back (as opposed to using a credit card).
To be able to understand why a reverse mortgage can be a smart choice despite the stigma around it, you have to know the advantages it can provide.
With the right borrower, a reverse mortgage can lead to significant benefits. Most notably:
No more mortgage payments. A reverse mortgage does not require repayment unlike types of home equity loans. If you are a retiree and are still paying off the mortgage, this can free up much-needed cash flow for other important expenses.
Full ownership. When you take out a reverse mortgage, you do not hand over the deed to your lender. You keep full ownership of the home and are still in full control.
Tax-free proceeds. The Internal Revenue Service does not consider reverse mortgage loan proceeds as income. Therefore, your entire loan proceeds are tax-free.
No effect on Medicare and Social Security. Taking out a reverse mortgage will not affect your Medicare and social security benefits unless your eligibility is based on certain needs. Any change in the availability of funds–not just from a reverse mortgage–may affect your access to these programs.
Protection for heirs. If the home value ends up being less than the loan balance (e.g. when home prices fall), your heirs do not have to pay the difference.
When Will a Reverse Mortgage Be a Smart Choice?
Just like other types of loans, a reverse mortgage is not ideal for everyone. However, it can be a powerful financial tool for the right person.
A reverse mortgage is a smart choice if:
You plan to stay in your home permanently. A reverse mortgage becomes payable when you move away permanently. That said, taking out a reverse mortgage is a good idea if you plan to live in your home for the rest of your life.
You are financially responsible. Loan obligations of a reverse mortgage include paying homeowner’s insurance, property taxes, and keeping the home in good shape. You have to be able to keep up with these requirements to prevent the loan from becoming due.
Furthermore, you have to be financially responsible enough to avoid spending too much of the proceeds too soon. You have to be confident that you can control your spending to avoid outliving the loan. If you want to avoid the temptation of spending too much money, receiving the funds through monthly payments is the best option rather than a lump sum or a line of credit.
You want to grow your line of credit. If you want your line of credit to grow over time, you can choose to leave it untouched. Savvy borrowers take out a reverse mortgage sooner rather than later and allow their line of credit to grow, which gives access to a larger amount of funds in the future.
Read more about how a reverse mortgage can offer a growing line of credit.
Your home’s value is increasing substantially. If your home’s value is increasing by a considerable amount, you may still have extra money for your estate even if you take out a reverse mortgage.
You can communicate clearly with your family. It is important to understand that a reverse mortgage leaves options for your heirs when it comes to inheriting your home. They can choose to pay off the loan balance if they want to keep it within the family or they can also refinance the loan. Make these options clear to your family so you can avoid unwanted surprises.
Furthermore, a reverse mortgage may help you maintain independence, which means you won’t have to turn to your family or take on additional debt in times of financial difficulties. Stress the importance of this goal to your children when concerns about non-inheritance arise. In fact, using loan proceeds strategically can increase the overall amount of wealth available to your estate when you die.
The Bottom Line
In order for a reverse mortgage to be a smart choice, you have to be a smart borrower. A reverse mortgage is ideal if you can meet the loan obligations and spend the proceeds responsibly. With the right usage of funds, you can secure your retirement and live out the rest of your life comfortably.
Discover what a reverse mortgage can do for you. Click here to Get Started.