Reverse Mortgages: The Little-Known Retirement Packages
The story goes about Cinderella, a young girl in ancient Greece. Cinderella stands out as a meek, helpless girl amidst abuse and ridicule in the fairy tale. She lived among selfish step sisters who always despised her. One day, a prince organized a ball and invited all the beautiful girls.
As it turned out, the prince fell in love with Cinderella. They both moved into the palace as a happily married couple.
The story resembles the current trend in home equity, where a reverse mortgage is a little-known yet essential pillar of financial planning. According to financial experts, home equity investment can cushion you against financial failure after retirement. Based on projections, the number of eligible applicants for reverse mortgages will increase from 46 million to 98 million by 2060.
Here we explore the concept of reverse mortgages and why they are the little-known retirement packages.
What Is a Reverse Mortgage?
It is a special loan that allows homeowners aged 62 years or more to leverage part of their equity into tax-free cash. Essentially, you can borrow some money using your home as collateral for the loan. The most common type of reverse mortgage is the government-backed Home Equity Conversion Mortgage.
How It Works
A reverse mortgage converts part of your equity into a monthly payment. Unlike a traditional mortgage, where you pay your monthly debt to the financier, a reverse mortgage is different. Instead, the financier pays you a premium as long as you live. Therefore, you will receive an advanced monthly payment from your home equity.
Similarly, the loan balance increases instead of decreasing every month. An increase comes from property fees and interests levied on the mortgage. Additionally, you should pay home insurance and property taxes, occupy the home as your principal residence, and keep it in good condition.
Why Is Reverse Mortgage a Neglected Retirement Tool?
Reverse mortgages have undoubtedly borne the burden of a negative reputation in the past. Some aspects of negative reputation come from myths and misinformation, while others were true but corrected by the Federal Housing Administration.
But how did reverse loans acquire the negative publicity and reputation from borrowers? Read on below:
1. Negative Perception
Top on the list is the negative perception that depicts reverse mortgages as the last resort. To most people, it is a mere last resort when you are broke or need quick cash after retirement. Unfortunately, the negative perception results from lousy publicity and inaccurate pictures.
On the contrary, a reverse mortgage comes in handy to supplement your retirement income. It can cover the cost of home repairs, medical expenses, and other costly loans that may have high-interest rates.
2. Depression-Era Thinking
The world experienced a time of economic recession from 1929-1941. It was the worst and longest crunch in the world's history, leading to the collapse of most economies, including the world stock market.
During the depression era, borrowers lost their property owing to failure to pay their mortgages. Lenders closed their mortgage companies after borrowers became high-risk defaulters. As a result, the stigma hit hard on prospective borrowers who saw mortgages as a sure ticket to property loss.
However, the depression-era thinking is no longer valid in the modern world. Unlike before, a reverse mortgage comes with a guaranteed assurance that you'll occupy the home as long as you live. All you have to do is pay your property taxes and mortgage insurance promptly.
3. Foreclosures and Taxes
After the grueling economic depression, widespread negative media coverage of the loan's strict foreclosures followed. Financiers required lenders to fulfill a set of foreclosures to cover the product if they failed to pay taxes or insurance premiums.
Currently, the situation is different. The FHA ensures the loan and lenders file foreclosures with the agency. Furthermore, reverse mortgage loans require no monthly payment. Hence you won't suffer the effect of foreclosures in case of non-payment.
4. Non-borrowing Spouse Debacle
The non-borrowing spouse was the biggest image debacle for reverse mortgage lenders. Before 2014, eligible husbands would exclude their underage (below 63 years) spouses from title ownership. They would then apply for a reverse mortgage and live happily.
Upon the husband's death, the wife would remain free from liability to repay the loan. Despite this, some financiers still compelled the wife to bear liability for the loan.
However, in 2015, the FHA changed the rules of lending. Today, you can freely include your under-age spouse as part of a guarantee that you'll both occupy the home. The remaining spouse still occupies the house despite the death of the borrower.
5. Risk of Losing Property
A reverse mortgage becomes a payable loan in case of death or when you cease to own the home. In case of death, for instance, the borrower's heirs or spouse may sell the home to raise the required cash.
If the home sells for less than the outstanding amount, the mortgage insurance pays the loan. However, heirs receive nothing and cannot claim the property.
Reverse Mortgage: Is It Worth?
According to debt.org, 30% of all households in the US have nothing to save for their retirement. A further 70% of US households only save an average of $ 73,200 for their retirement. The little savings can barely last for a few years before depletion.
If you live on a fixed budget after retirement, a reverse mortgage can help you overcome a strain on your budget. It acts as a supplement for your social security fund and medical expenses.
If you are 62 years or older yet in need of supplemental income, contact a financial institution to check on eligibility for a reverse loan.