What is a Reverse Mortgage & What Can it Do for You?
In a nutshell, a reverse mortgage is basically the opposite of a traditional home loan.
As you pay off a regular mortgage the smaller the loan becomes. With a reverse mortgage, the longer you have it, the larger it gets.
You may be thinking, home mortgages don’t work that way. And normally they don’t.
Reverse mortgages are fairly complex financial products that allow the home owner to borrow money using the equity in their home as security.
The home owners who are best served by this product are those over 60 years of age. A reverse mortgage can be one of the best ways to fund your retirement.
Question: So how does that work? Well, let me tell you.
The structure of a reverse mortgage can be underwritten to be paid out as either:
– a lump sum
– a regular stream of income
– a line of credit
– or a combination of these options
Interest is charged like any other loan, except you don’t have to make repayments while you live in your home. The interest compounds over time and is added to your loan balance.
This calculation will be the barometer used to determine the amount you can borrow against the home. Additionally, the age of the younger spouse is taken into consideration.
You remain the owner of your home and can stay in it for as long as you want.
However, you must repay the loan in full (all interest and fees included), when you either:
– sell the home
– or move into an eldercare facility
Question: Who is best suited for this type of financial product?
It’s simple. The best candidates are people who have either retired or are soon to be retired.
Let’s look at an ideal reverse mortgage scenario:
There are 2 ideal candidates:
#1 – A retired person, 65 years old, who owns a lot of asset based wealth (mostly in their home) but has almost no available cash.
#2 – A senior citizen who’s looking for cash to supplement their pension or part time income. Someone who would have difficulty paying for their day to day activities in their golden years.
A reverse mortgage can be used to convert the current value of your home into available cash.
It’s best if the senior person owns their property free and clear although it’s not usually a problem if there’s a small balance remaining on the original mortgage.
Question: How much will it cost?
To set up a reverse mortgage it’s usually in the neighborhood of $1000 to $2000.
After that, the monthly fees may be $20 or nothing at all. This depends on many factors mostly on the lending institution you set up the reverse mortgage with.
Keep in mind, that the interest rates will probably be 1% or 2% higher than a regular mortgage because no monthly payments are required.
Also, in some cases, the receipt of a reverse mortgage may impact the homeowner eligibility for a pension.
However, like any other banking product, it’s best to obtain financial, as well as, legal advice before you move forward with a reverse mortgage. In fact, many lenders will insist on it.
Let’s break down the Pros and Cons of obtaining a reverse mortgage:
– The debt owed to the bank is normally capped at the market value of your home
– It helps mortgage free but cash strapped homeowners fund their retirement
– There are options for payouts (eg. regular payments, line of credit or lump sum)
– It could allow homeowners to stay in their homes, whereas they may have had to sell otherwise
– If you must, you can always sell your home and pay off the debt
– There are higher interest rates than on a regular mortgage
– The interest starts accumulating from the first day
– If you’re the sole owner, your spouse or other occupants may have to leave the property when you die
– The younger you are and the more you borrow against your home now, the less equity you’ll have in your home in the future
There is a lot to consider when looking at signing on for a reverse mortgage.
Our associates at Real Property Money can help you. Our consultations are always FREE.
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