Mortgage 101 – Reverse Mortgage Loan
A reverse mortgage loan is a way that you can utilize your home to obtain additional income and eliminate monthly payments on your home in your retirement years. In the past, you had to sell your house or use it as collateral for a loan which had to be repaid in monthly installments.
A reverse mortgage, on the other hand, is a type of mortgage loan where the loan amount is not repaid as long as the homeowner is still living inside the house. The loan is only repaid when the borrowers passes away, permanently moves out of the house, or if the house is sold. The lender pays out the loan in three ways: lump sum, monthly payouts, or line of credit. This in reality is a great pro and benefit for the elderly.
Advantages of a Reverse Mortgage Loan
The main advantage of a reverse mortgage loan is that they are an extremely flexible financial planning product with very few – if any – restrictions on how you receive and use the money.Given the right set of circumstances, a reverse mortgage loan can be an ideal way to increase your spending power in retirement.
Key advantages and benefits of a reverse mortgage loans include:
- Low risk of default
- No downside: With a reverse mortgage loan you will never owe more than your home’s value at the time the loan is repaid, even if the reverse mortgage lender has paid you more money than the value of the home. This is a particularly useful advantage if home values decline after you secure a reverse mortgage loan.
- Tax free: As a Reverse Mortgage is a loan, the money from it is typically tax-free, whether you receive it as fixed income or in a lump sum.
- No restrictions: How you use the funds from a reverse mortgage loan is entirely up to you – go traveling, purchase long term care insurance, pay for your children’s college education, or simply leave it sitting for a rainy day – anything goes.
- Flexible Payment Options: Depending on the type of loan you choose, you can receive the reverse mortgage loan funds in the form of a lump sum, annuity, credit line or some combination of the above.
- Easy Pre-Qualifications: There are no income qualifications to get a reverse mortgage loan.
- Home Ownership: With a reverse mortgage loan, you retain home ownership and the ability to live in your home. As such you are still required to keep up insurance, property taxes and maintenance for your home.
- Guaranteed Place to Live: You can live in your home for as long as you want when you secure a reverse mortgage loan.
- Federally Insured: The Home Equity Conversion Mortgages (HECM) is the most widely available reverse mortgage loan. It is managed by the Department of Housing and Urban Affairs and is federally insured. This is important since even if your reverse mortgage lender defaults, you’ll still receive your payments.
Disadvantages of a Reverse Mortgage
A Reverse Mortgage may not be for everyone, consider the following:
Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a reverse mortgage loan does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a reverse mortgage loan.)
Reconsider if You Are Planning to Move in the Near Term: Since a reverse mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those than plan to move soon to another residence.
Evaluate if You are Willing to Reduce Your Heirs Inheritance: Many people dismiss a reverse mortgage loan as a retirement option because they want to be sure their home goes to their heirs. And it is true, a reverse mortgage loan decreases your home equity – affecting your estate. However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. There are numerous potential estate and retirement planning benefits to a reverse mortgage.