Are you looking to give your retirement fund a little boost? Maybe you’re looking for a financial tool that offers the flexibility to use it when you need it but that grows when you don’t. Maybe you’re looking to downsize but hate the thought of a new mortgage payment.*
If any of these sound like you, a reverse mortgage might make a lot of sense for you. A reverse mortgage allows homeowners 62 and older to take the equity out of their home and have the mortgage company pay them instead of having a monthly payment.
Our friends at One Reverse Mortgage help homeowners open up new financial options every day. How does a reverse mortgage work? Glad you asked!
Reverse Mortgage Basics
A reverse mortgage, also called a home equity conversion mortgage, allows eligible homeowners to pull equity out of their home. The client gets a loan amount based on the amount of equity available in their home and their age. If they still have an existing mortgage, the proceeds of the loan are used to pay that off. The rest of the loan is available for the homeowners to use as they see fit.
You don’t have to make a monthly payment (other than taxes and insurance) on the loan for as long as you still live in the home.* A financial assessment is done analyzing factors such as your income, assets and credit to make sure you have the ability to pay for taxes and insurance. If you don’t, money from the loan is set aside to make these payments.
Not only can reverse mortgages provide financial flexibility, but they have the added benefit of being nonrecourse loans. This means that under no circumstances are the homeowners’ heirs responsible for paying back more than they can get in the sale of the house. If it sells for less than the balance, the FHA absorbs the difference.
A Financial Tool
The primary advantage of a reverse mortgage is its versatility as a financial tool. There are three different varieties to take a look at:
Line of Credit
One option you might explore is a line of credit. The principal benefit of this is that you can put the loan in place and not touch the money right away. Why would you want this?
Let’s say you’ve just turned 62 and you own your home free and clear. Instead of tying your assets up in your house, you want to put this money somewhere that you can reach it. You decide to get a reverse mortgage and take advantage of a line of credit.
With the line of credit option, the full loan amount (based on age and amount of equity) is available to you within an account that gains interest.
Unlike a home equity line of credit, your reverse mortgage line of credit continues to grow, so it’s not tied to ups and downs in the housing market. This can make it an excellent tool to add to your retirement portfolio.
When you start taking money out, you can always pay the money back into the account. You don’t have to, but it allows you to put the investment back in so you can continue to grow your funds.
It’s important to note that the rate on a reverse mortgage line of credit is adjustable. Some people are comfortable with that, while others aren’t.
The second reverse mortgage option can work a lot like a cash-out refinance, but you have a little more flexibility in what you can do and no monthly mortgage payment for as long as you live in the house.*
With an adjustable rate loan, you can take a lump sum at closing, receive monthly payments or do both in combination. This would give your other retirement benefits (like Social Security) time to grow while you refrain from accessing them.
You can also get a fixed-rate loan, where the interest rate is locked. With this option, you get a lump sum payment that might be used to pay off your mortgage balance, any property liens, medical bills and home maintenance.
Many seniors want to move when the nest empties. Maybe they want to move closer to the grandkids, or maybe they just want to downsize. Either way, the reverse for purchase program allows you to use reverse mortgage funds to purchase a new home without monthly mortgage payments.
It’s important to note that the program does require a significant down payment that varies based on your age and the interest rate of the reverse mortgage. However, you can use the proceeds from the sale of your existing home to cover it.
What Happens if You’re No Longer at Home?
If all borrowers on the loan no longer live in the home, the loan becomes due. At this point, your heirs have three options:
- Sell the home. If the home sells for more than the loan balance, your heirs keep the rest. Otherwise, they only have to pay back what they can sell the home for.
- Keep the home. They can do this by refinancing 95% of the home’s value or the balance of the loan (whichever is lower) into a regular mortgage.
- Let the home go. If your heirs don’t want to do anything with the home at all, they don’t have to make a payment, and the home goes back to the lender or investor in the mortgage.
As mentioned earlier, reverse mortgages are nonrecourse loans, so your heirs don’t have to be responsible for the loan.
Does a reverse mortgage sound right for you? You can get started today with help from One Reverse Mortgage. Any questions? You can also give one of their Reverse Mortgage Experts a call at (888) 980-1543. Go ahead and leave them in the comments below.
*The homeowner is still responsible for taxes, insurance and property maintenance.
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