Are you hitting that age where you’re thinking about retiring? Are your eyes set on finally not having to worry about work? As they should be! If you’re hitting that age range of 62 or above, it’s time for you to take a load off, right? So what’s stopping you? Financial stability is usually the reason why. For seniors 62 and up, it’s nerve-racking thinking about whether or not you’ll have enough money to live on. Not having enough money to live off of after retirement, it’s a serious issue that many run into. However, the solution to your worries is most likely right under your nose! We’d like to suggest this simple solution that turns your home’s equity into cash. If you’re an established person of 62 years or older, chances are you’re sitting on a lot of home equity that can be put to good use, and you barely need to lift a finger to get money for it. If you want to live a care-free retired life with enough money to live off of, but aren’t sure how to get that money, consider a Reverse Mortgage.
Reverse Mortgage Defined
So, what exactly is a Reverse Mortgage? Simply put, a reverse mortgage is a type of loan. This type of loan allows homeowners to convert their home equity into cash they can have, with no monthly mortgage payments. Essentially, you borrow money against the value of your home and receive a lump sum, fixed monthly payment, or line of credit. But how do you pay this mortgage back? This type of mortgage is able to be paid back when the homeowner dies, moves away, or sells the home.
This is a great option for seniors that don’t have enough money in savings, but are looking to retire without worrying about money. If these seniors have a lot of equity tied to their house, they can put it to use. Seniors may not have as much money as they thought they’d need saved up, but chances are their house is worth a whole lot of money. Doesn’t this loan sound like a great way to make a lot of money with very little effort? Slow down there, don’t get too ahead of yourself. This type of mortgage is not so “cut-and-dry”. Unfortunately, these types of mortgages can be confusing and complicated, thus making them more susceptible to being used as scams. It’s sad to see mortgage companies taking advantage of elderly folks looking for ways to live comfortably. In this blog post, we’ll help you better understand how a reverse mortgage works, what it can do for people looking to retire, and how to avoid scams that are looking to take advantage of you for your home’s equity.
How a Reverse Mortgage Works
Normally, with a loan, the homeowner would be making payments to the lender. However, with a reverse mortgage, the lender makes payments to the homeowner. It’s pretty much a normal mortgage, but reversed (just like the name says)! With this type of loan, the homeowner can choose to receive payments in one of six ways. The only thing they need to pay interest on is the proceeds. Nothing is paid upfront since the loan is rolled into a loan balance. Homeowners are able to keep the title to their home, but, over time, the borrower’s debt increases while their home equity decreases.
With this type of loan, the home acts as collateral. Let’s say the homeowner moves or passes away, what happens next? Well, all proceeds from the residency’s sale go directly to the lender to pay off the reverse mortgage. Any proceeds to go beyond what was borrowed from the borrowers will be given back to the homeowners. One important thing you should know is that reverse mortgage proceeds are not taxable. Homeowners may see it as income, the IRS sees that money as a loan advance.
When a reverse mortgage is taken out by a homeowner, they can choose to be paid in one out of six ways, but you’ll need at least 50% equity to qualify for this type of mortgage:
- Line of Credit: Money is available to borrow as it is needed. The homeowner does, however, pay interest on the amounts borrowed from the credit line.
- Equal Monthly Payments: As long as one of the homeowners is alive, the lender will still make monthly payments to them.
- Term Payments: The lender gives the homeowner steady monthly payments for a set period of time, which the homeowner can choose (i.e. 15 years).
- Term Payments + Line of Credit: The lender gives the homeowner steady monthly payments for a set period of time, which the homeowner can choose (i.e. 15 years). If the homeowner needs more money, they can access the line of credit.
- Lump Sum: This is simply getting all proceeds at once when the loan closes. Lump Sum comes with a fixed interest rate, while the other options have adjustable interest rates.
- Equal Monthly Payments + Line of Credit: The lender provides monthly payments as long as there is at least one homeowner occupying the residence. If the homeowner needs more money, they can access the line of credit.
Reverse Mortgages can always be tricky business, so how do you know if you’ll benefit from applying for one? Let’s talk about that!
Will I Benefit from a Reverse Mortgage?
A reverse mortgage sounds like a great way to turn your home into equity, right? Don’t be so quick to jump to conclusions! This type of mortgage isn’t for everyone, it’s essential to look at all the details and consider all your options. Let’s talk about who can benefit from these kinds of mortgages and whether or not it’s right for you.
Reverse mortgages are very similar to line of credit and home equity loan in the same way that all of these can provide a lump sum/line of credit that can be accessed by the borrower as needed based on how much of the home is paid for and the home’s market value. The main difference between reverse mortgages and a line of credit/home equity loans is that the borrower does not need a source of income or good credit. The borrower also won’t make any sort of loan payments while they still have residency in the home they’re acquiring this loan for. Most of the time, seniors apply for reverse mortgages if they want to access their home’s equity without selling it. Let’s weigh out the pros and cons of moving forward with a reverse mortgage:
Pros of Reverse Mortgages:
- Once a person becomes 62, a person is able to put their home’s equity to better use. They’re able to make money off the equity they’ve built up over the years of owning a house.
- It’s a great way to acquire money to meet basic living necessities without having to continue work.
- Great for people that want to continue living in their home, while also putting the equity to good use.
- Perfect for homeowners looking for long-term financial stability.
Cons of Reverse Mortgages:
- A person has to spend a significant chunk of their equity that they’ve accumulated over the years.
- The home will most likely not be able to be passed down to children, grandchildren, or friends since the lenders will acquire the proceeds to the home.
- Bad for homeowners looking for short-term financial solutions. There’s too much to sacrifice if you’re looking for short-term solutions.
- If someone lives in the house with you (friend, relative, roommate, etc.), they will not have the right to live there anymore after the main borrower passes away. Only the borrowers significant other will have the right to live there, so long as they are able to carry out the mortgage.
- If a person outlives their proceeds, they won’t have enough equity to support themselves anymore. If the borrower has expensive taste, but winds up spending more money than they think they have, they could wind up in some serious financial trouble.
When it comes to reverse mortgages, it’s important to consider all the details we’ve discussed. Weigh out all the pros and cons and ask yourself, “Is this going to provide me with long-term financial stability?” People tend to misuse reverse mortgages and wind up losing, not only their home equity, but so much more. If you use this loan wisely, you can put your home’s equity to use, live a carefree life in retirement, and not worry too much about financial stability. Reverse mortgages can be a great way for retired seniors to still make some money without actually working. However, it’s best for you to consider all your options before deciding on a mortgage like this. Loans like these can help some, but can destroy others.