A reverse mortgage is a government-insured program that allows homeowners 62 years or older to convert a portion of the equity in their home into cash. It’s also known as a Home Equity Conversion Mortgage (HECM) and is another resource you can take advantage of as part of your current retirement plan. In addition to social security, pension, 401k or other money you may have access to after retiring, the reverse mortgage has many loan options with which you can tap into your home equity. You can even get a good estimate of just how much equity you can access by using a reverse mortgage calculator.
Home Equity as a Retirement Tool
Reverse mortgage lenders like the Quicken Loans sister company One Reverse Mortgage can help you with your reverse mortgage retirement planning. You can get your loan in the form of a lump sum payment, a monthly payment or as a line of credit, depending on the loan type chosen.
Think of this as another tool in your retirement portfolio. Let’s take a look at the line of credit, for example.
By choosing the line of credit option, you can close on your mortgage and then leave the money in the account until you need it. While you leave it in the account, the money will increase in value annually at the interest rate of your loan, just as it would in your checking or savings account.
This also protects your equity because the value in your line of credit continues to increase even if the value of your home decreases.
This amount is available for you to use whenever and however you want. The line of credit option can also give you lots of flexibility and provide peace of mind should any unforeseen expenses arise.
With either a lump sum or monthly payment option, you can live off the money you receive and defer using your other retirement assets, which gives them more time to increase in value. If you don’t own your home outright, part of your money is used to pay off your existing mortgage. The remainder of the money is paid out to you.
You’ll never have to make a mortgage payment for as long as any borrower on your loan lives in the house.
Why Not a Home Equity Loan?
Why a reverse mortgage? After all, can’t you get a line of credit from your home equity?
The disadvantage of home equity lines of credit (HELOCs) is that they come with a monthly payment. A reverse mortgage eliminates your monthly mortgage payment (although you’re still responsible for taxes, insurance and property maintenance) altogether while still giving you access to your equity.
Obviously, any loan you take out eventually needs to be repaid. The good thing about a reverse mortgage is that it’s a nonrecourse loan. This means you or your heirs aren’t responsible your heirs for paying back more than you or they can get for the property in a sale.
The FHA covers the difference for government-backed mortgages and the lender covers loans not backed by the FHA. Either way, the responsibility doesn’t fall back on you to pay the remaining balance.
If your heirs wish to keep the home, they can refinance 95% of the home’s value or the balance of the loan – whichever is lower – into a traditional mortgage.
When you have a reverse mortgage, even without making a monthly mortgage payment, you’re still responsible for taxes and insurance. This is the only payment you still have to make.
Your other responsibility is to maintain the condition of the property and keep up with anything that needs to be done around the house.
Let’s walk through the process of getting your reverse mortgage.
First, we recommend you talk to your lender. They can assess your goals and talk about the best options for your situation.
When you apply, you go through a process known as financial assessment. Your income and assets are looked at to get a picture of your situation and whether or not you can comfortably make the payments.
If necessary, the lender will hold back part of your payout from the loan and put it in an escrow account for your taxes and insurance.
After applying, you’re required to go through counseling. This is how the government makes sure you fully understand your responsibilities after you get the loan and the repayment process.
Your house is then appraised to determine its value. This tells the lender how much money they can give you for your house. Once that all comes back, the loan can be closed and you can access your equity.
If this sounds like something that might interest you, you can get started here. What would you do with access to your equity? Share in the comments below!
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