If you’re looking for a way to get out of debt and to gain financial independence, then a reverse mortgage might be for you. What’s more, is that a reverse mortgage can help you to gain more disposable income, and to free up your assets. The catch? It’s usually only available to seniors. If that includes you though… then you’re good to go!
So what precisely is a reverse mortgage? Essentially, this is a loan that is available to a homeowner that is over 62 years of age1. As the name implies, this works a little like a home loan in reverse. Because the homeowner will have equity in their property, they will be able to borrow against that value in exchange for a lump sum.
What makes a reverse mortgage unique though, is that you won’t need to make loan repayments. Instead, the entire loan balance becomes due all at once – at the moment that the borrower either dies, moves out of their current home, or sells their property. At this point, the lender seizes the property and thereby pays off the outstanding debt.
This might seem like black magic: essentially it means you are receiving regular income, while nothing about your current circumstances will change! From the perspective of the bank, they are essentially paying for your home in installments.
When you receive a reverse mortgage, you of course need to ensure that the total amount of the loan will never exceed the value of the property. This of course ensures that there will not be any outstanding amount once the total amount is due and the property is sold.
What’s also particularly important is that the borrower/borrower’s estate won’t be responsible for paying any difference if the loan should become larger than the value of the property. This is important too, as outside factors can sometimes impact on the price of a home: such as a natural disaster. This way, it will be the lender that will take on the risk.
Pros and Cons
One of the big advantages of a reverse mortgage is that the recipient won’t need to make any changes to their current lifestyle, but will receive a steady new income to help them enjoy a more comfortable style of living. This can be particularly useful if the individual does not have an extensive retirement plan, for whatever reason.
Perhaps best of all, is that the borrower still maintains the title on their home. The property ownership is not being transferred to the bank, but rather the home is being used as collateral. The difference is that the agreement is that this collateral will be collected on at some point. Reverse mortgages are also federally insured.
That said, there are some important caveats to consider. For example, it’s worth noting that this is still a loan, which means there is still interest. Interest means that you will pay back more than the total of what you borrow, which means you will be losing money on the value of your home.
However, the borrower does not need to pay anything up front as that interest in included in the monthly costs. What’s more, is that the loan will usually involve relatively low amounts of interest, seeing as this is a particularly safe and secure option for the banks. Because they are almost guaranteed to receive the property at the end of the agreement, there is a very low likelihood of anything happening to their investment. Thus they are able to offer a lower rate.
Heirs and Family
Perhaps the biggest downside of using a reverse mortgage, is that it leaves less of an estate for surviving heirs and family members. In other words, if you were to pass away without a loan of this nature, you would normally leave your property to your children or grandchildren to benefit from. They will likely then sell the property in many cases to liquidize the assets, or they might even choose to keep the property and move into it! Either way, you deny your surviving family that option by using a reverse mortgage.
That said, there are some caveats to this point to keep in mind. Firstly, any value greater than the loan that is obtained through the sale of the property will still go to your heirs. Depending on your age and how much you are borrowing, this might still be a good amount!
Another consideration is that there is never any guarantee that you’ll be able to pass on the value of your property anyway. While it’s not nice to think about, many people over 85 find that as they get older, they require care and assistance. The cost of full-time care can be extremely high, and this can result in the loss of property and assets.
In many cases, you will end up spending all of your equity and savings to afford this care, ultimately leaving nothing behind.
This is not especially common, and you shouldn’t assume it will be the case. But what you do need to be aware of, is simply that there are no guarantees. So why not enjoy the money you earned while you can? What’s more, is that there is no reason you can’t give some of the money you receive from your reverse mortgage to your kids and grandchildren. Why not let them enjoy it now while you know it’s there, and while you can witness them putting it to good use?
Types of Reverse Mortgage
Finally, there are different types of reverse mortgage, and many options for repayments.
The three types of reverse mortgage are2:
- HECM (Home Equity Conversion Mortgage)
- Proprietary Reverse Mortgage
- Single-Purpose Reverse Mortgage
The most common type, and the type we have discussed here, is the HECM. This can then provide payments in a range of different manners:
- Lump sum
- Equal monthly payments (annuity)
- Term payments
- Line of credit
- Equal monthly payments plus a line of credit
When choosing a reverse mortgage, it is your job to decide which option suits you best and will result in the best rates over the long term.
Whatever you decide, this is a great way to regain some cash flow and to really enjoy your retirement!