The reality is – we are living longer. Much longer. While this is great news, it requires the appropriate planning from a financial standpoint. A larger retirement savings is essential in order to supplement retirement income, fund medical expenses or just to maintain your standard of living throughout what should be a relaxing, stress-free time in your life.
There are many financial tools retirees use to supplement their income, and a new tool has been added to the financial tool box – a reverse mortgage. While some may be wary about taking an additional loan out from the bank, it is important to realize that a reverse mortgage varies little from a traditional mortgage – except you are receiving payments.
What Is A Reverse Mortgage?
Specifically designed for homeowners over the age of 62, reverse mortgages are recreating how retirees are planning their financial futures. At LendingTree, our mortgage experts are viewing them as a tool for retirees to obtain their financial freedom, given the appropriate circumstances.
Initially, reverse mortgages were undoubtedly seen as a risky option, but in 1994 the government stepped in and regulated the space, requiring lenders to disclose to borrowers the total annual loan costs at the beginning of the application. In addition it is now mandatory for lenders to complete a financial assessment of potential borrowers before approving a reverse mortgage loan, yet another method to protect the borrower.
Since implementing these changes, reverse mortgages have not only become safer, but they have consistently provided retirees with the supplemental income needed to maintain their current lifestyle. Before continuing, we would like to provide you with the basic facts about a reverse mortgage:
- Reverse mortgages are Federal Housing Association (FHA) insured loans
- At least one of the borrowers needs to be age 62 or above
- Those who take a reverse mortgage are borrowing against their home's equity
- Reverse mortgages do not need to be repaid as long as one of the borrowers lives in the house
- Reverse mortgages almost always eliminate any other ongoing mortgage payments
- Borrowers have options on how they wish to receive their payment:
- Monthly annuity
- Lump sum
- Line of credit used against their house
- A combination of the above
- Reverse mortgages are a proven source of financial independence
- It's essential to comparison shop multiple lenders as offers can vary widely
What Do I Get?
Just as is true with most Americans, your home is likely the most valuable asset you own. A reverse mortgage allows you to utilize that asset by tapping into the equity of your home. Here is how it works:
After shopping for the best possible loan, carefully choose the one that best fits your financial needs. The money you receive from that loan is tax-free and can be used for anything, yes, anything, so long as you continue to pay insurance, property taxes, and do not allow the home to significantly deteriorate. To put it simply – the lender is buying your home from you and also letting you continue to live in it at the same time. That means someone is literally paying you so that you can live in your own home. You only have to pay back the loan if you pass away or decide to leave the property.
What Does the Bank Get?
In exchange, the loan you receive accrues interest but only becomes payable once you pass away, move, or sell the home. As opposed to a traditional loan which accrues interest until it is repaid, a reverse mortgage has a cap on the interest payable. If the loan grows to be larger than the value of your home, you will not be required to repay any additional loan balances in excess of the value of the home. When the loan comes due, the bank only has a single form of recourse available to them – through the house. This feature of a reverse mortgage provides peace of mind, ensuring that your debt will never be extended to your heirs, income, or any asset other than the home itself.
How Do I Know If A Reverse Mortgage Is Right For Me?
Reverse Mortgages, just like any other financial instruments, are not suitable for everyone. For example, if you plan on leaving your home within the next few years, a traditional refinance may work better for you. LendingTree has connected thousands of people with reverse mortgage lenders, consistently matching our customers with the best offer available to them. Once you have obtained offers, evaluate them along fairly typical lines:
- What is the interest rate being quoted?
- What is the total amount the lender is offering and over what length of time?
- What fees and other additional charges should I expect?
- Have I maximized my chances of getting the best deal by evaluating multiple offers?
If you are ready for more information regarding how a reverse mortgage can provide tremendous financial relief, please click below to discuss your options with licensed lenders.