Reverse mortgages are another source of income. They’re a type of mortgage that allow senior homeowners to borrow money against their home’s value. They don’t have to repay the mortgage until their home is sold or after they pass away.
These mortgages essentially provide another source of income for those in retirement, allowing them to extend the value of their home for the twilight years of their life.
The Basics of Reverse Mortgages
As mentioned, reverse mortgages allow homeowners to take out money against the value of their home. Reverse mortgages don’t require senior homeowners to repay until their death (though beneficiaries) or until they decide to sell off their home.
Of course, several concessions are taken in order to ensure the loan itself doesn’t exceed the value of their home, throughout the lifetime of such a loan. Some of those factors include the initial mortgage amount, interest rates, loan duration and the home’s price appreciation rate.
Seniors aged 62 and older qualify for reverse mortgages. Some generally choose reverse mortgages for another retirement income source, while others choose to help pay off their current mortgage, healthcare expenses or expenses for home improvement work.
Several types of reverse mortgages exist:
Single purpose reverse mortgages – Offered by state and local government agencies, in addition to some non-profit organizations. Considered the least expensive option and aren’t widely available. They must only be used for the purpose specified by the lender.
Federally insured reverse mortgages – Also known as Home Equity Conversion Mortgages (HECMs), they’re mainly offered by federal government organizations like the United States Department of Housing and Urban Development. Although the most common, they’re considered expensive in some respects.
Proprietary reverse mortgages – Also known as ‘private’ reverse mortgages, these reveres mortgages are offered by private lenders, otherwise known as the companies who back such mortgages.
Before choosing to take out a reverse mortgage, senior homeowners are highly advise to meet with an adviser to discuss the details of their impending financial transaction. In fact, this step is pretty much required by many lenders who deal with reverse mortgages.
Each type of reverse mortgage offers a different set of options for senior homeowners. Therefore, it’s pretty important for them to research their options before choosing one for whatever purpose they may have in mind.
As a secured property loan, reverse mortgages offer inherent benefits and disadvantages. So, they won’t be the best option for all senior homeowners. But, for those that do benefit, they generally end up working out in the end. In order to understand how that goes, let’s look at the pros and cons of reverse mortgages.
Reverse mortgage have inherent benefits—to start, the prospect of securing a loan against one’s home is one of them, among others….
1. Frees up funds for senior living. Seniors that do take out a reverse mortgage get to use their free funds to get things that they need or want. Medical bills, home repairs and even much needed vacations are some of the necessities that seniors get after receiving their loan funds.
2. Different payment methods. Reverse mortgages are flexible, in that they allow seniors to choose how to receive their funds. Some choose to receive their funds in the form of a credit line advance, lump sums or monthly/annual equal installments.
3. Deferred payment for the entire loan. Seniors, as mentioned, don’t have to repay their loan until the entire loan is due and payable by any of the aforementioned circumstances.
4. Never owe more than the home’s value. Seniors and their beneficiaries/heirs don’t have to pay any more than what’s allotted by the value of their home.
5. Lenders can’t collect as they wish. Lenders won’t be able to collect due payments if the value of the home falls under the loaned amount.
Being a secured property loan may make a reverse mortgage a touchy subject for seniors who might worry about finances—especially regarding the whole equity thing….
1. Loss of equity essentially ‘sells’ home. Many seniors might not like using up their home equity in exchange for securing a loan against their property. That essentially ‘sells’ the home, since it more or less becomes the lender’s business.
2. Owed interest from lender payments. Interest doesn’t magically go away—seniors will have to pay interest on top of their loan amounts, making it so they’re not exactly spending as much as they’re being loaned.
3. Lender jeopardy. If something happens to the lender, the secured home may be seized, especially if it involves financial issues with the lender.
4. The home isn’t a primary residence. Seniors may lose benefits from their reverse mortgage if their home eventually stops being their primary residence.
Senior homeowners can squeeze more value out of their home in various ways, most involving home improvement and the like. But, reverse mortgages are another way seniors can get more value from their home and even sap another source of income out of their investment.
They’re not for every senior age 62 and older, but they work well for those that know they can benefit from them.