Most people don’t know what a reverse mortgage is, and because reverse mortgages are a relatively new idea for seniors in the United States, there is a lack of understanding. The reality is that reverse mortgages may be an answer to one of the biggest economic problems facing us in the United States, which is that baby boomers don’t have enough money to retire.
In spite of available 401K plans, the Federal Reserve is quoting that around one-third of baby boomers have little to no retirement savings and are in danger of not having enough money to maintain their standard of living in retirement. If you are in this situation and 62 or older, you have a second chance with a reverse mortgage, which is a unique type of loan that allows homeowners to use the equity in their home to eliminate monthly mortgage payments and/or supplement their income without having to sell their home or give up title.
Unlike traditional mortgages, a reverse mortgage does not require a monthly mortgage payment. It’s the opposite. You can take the equity out of your home in one lump sum, or, as long as you remain current paying your property taxes, insurance and home maintenance, you can take it in monthly payments. The loan balance does not need to be repaid as long as one of the borrowing spouses remains living in the home. When both borrowers are no longer living, the home is sold and the amount owed is paid back to the lender. This is a non-recourse loan, which means if the amount owed exceeds the value of the equity in the home, the lender has no recourse. Any surplus beyond the value of the original appraisal will be disbursed to the heirs.
- A reverse mortgage requires no repayment as long as the home is occupied and the borrower remains current on their obligations.
- Enables a person to supplement a fixed income with tax-free funds in order to cover daily expenses.
- Allows the client to use their equity in whatever way they choose.
- If the loan is paid off early, there are no prepayment penalties.
- The upfront fees can be financed into the loan to prevent any out-of-pocket costs.
- Requires pre-loan counseling in order to make certain that the borrower is completely informed.
- Federally-insured, so the borrowers can never owe more than the home is worth due to the non-recourse feature.
- Provides flexible disbursement options (i.e. monthly sum or line of credit).
- Eliminates any existing mortgage.
- Interest rates may be lower than other options.
- Could give a borrower the money needed to get off of Medicaid and onto Medicare.
- Depending on the program, the upfront fees can be higher than other types of financing.
- Reduces the amount of equity left to your heirs.
- Does not allow interest to be taken as a tax deduction until payments are made or the loan becomes due.
- Can become due and payable in full if the terms of the loan are not met.
- Reverse mortgages are not well understood by many people.
The process of getting a reverse mortgage involves choosing a lender, attending a session with a HUD–approved financial counselor to make sure you are completely informed, getting your home appraised and inspected, and if you qualify, your loan will be funded.
Many baby boomers’ biggest asset is their home, and a reverse mortgage allows you to stay in it, rather than relocate elsewhere. There are neither payments involved nor are there any income or credit requirements. Having a reverse mortgage means you are borrowing from your home’s equity. The reverse mortgage lender does not take the title to your home, you remain the owner. While this means that you are still responsible for property taxes and any general costs and repairs associated with home ownership, the loan is simply a lien against the property. Over 50,000 baby boomers took advantage of a reverse mortgage last year, and we will see that number climb as the understanding of these loans increases and the number of baby boomers retiring increases.
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