Several factors come to play including, associated costs, fear of losing property, and home equity.
On the contrary, a reverse mortgage could be the right choice for you. Here you’ll discover why a reverse mortgage is a good idea and some factors that hinder people from signing up.
Is Reverse Mortgage a Good Idea?
A reverse mortgage is a good financial tool that enables financial security in retirement. All you require is sound financial advice on how to manage your equity to avoid depletion.
Below are some reasons why a reverse mortgage is a good idea:
1. Easy Access to Quick Cash
You could have a home, a small debt on your mortgage yet cash-starved. With enough home equity, you can get ready cash into your bank account.
If, for instance, you’re struggling to offset food, medication, and utility expenses, a reverse mortgage comes in handy to cover your cost of living.
Similarly, you may have a huge outstanding balance on your mortgage and be caught up by retirement age. It would be a good idea to take a lump-sum reverse mortgage to clear the bill. The strategy helps you regain control of your cash flow by reducing the costly monthly expenses of mortgage repayment.
Although you’ll still pay property taxes and insurance premiums, eliminating monthly mortgage payments gives you a deserved peace of mind.
2. Preserved Retirement Assets
A reverse mortgage helps preserve your assets. Assuming you have little savings accruing from contribution schemes such as IRA, you’ll want to use them sparingly, knowing they are insufficient.
What better way do you have to save your assets? A reverse mortgage allows you to access additional cash for your nest egg. As a result, you won’t worry about depleting other assets.
3. Flexible Payment Option
One advantage of a reverse mortgage is its flexible payment plan. It allows you to pocket the cash and decide on a convenient repayment schedule. Whether you choose monthly or annual payment, it’s you to decide.
You can also make continuous, regular payments as long as you live and occupy the home. When you pass on, your heirs have the discretion to sell the property and pay the remaining balance. And if the proceeds are not sufficient, FHA Mortgage insurance covers the remaining debt.
4. Guarantee of Equity As Security
When applying for a reverse mortgage, your financier guarantees that you won’t owe more than your home’s market value. Therefore, your investments, heirs, spouse, or real estate are not part of the collateral.
Why Do People Fear Reverse Mortgages?
Borrowers have varying feelings when making decisions about reverse mortgages. While others embrace it, others feel it is a bad idea.
Here are reasons why some people fear reverse mortgages:
1. Fee and Associated Costs
People are slow to accept reverse mortgages because of varying costs they’ll pay. Apart from closing costs that the lender charges, other associated costs do not go directly to the financiers.
According to the agreed plan, premium insurance is deducted from the equity amount given to you. For example, a HECM attracts an insurance premium of 2% of the equity amount, on top of a 0.5% annual mortgage premium. Moreover, you’ll pay an origination fee which is a percentage of the home value.
If you borrow a small amount of money or borrow only for a shorter time, you are likely to benefit the least from the loan. Remember, your costs depend on the value of the home and not the amount you borrow. Similarly, if you borrow for a shorter time, you will incur high closing costs.
Therefore, customers take a keen consideration of the costs because they are likely to increase the debt.
2. Depleted Home Equity
People fear reverse mortgages because it depletes the home equity. The financier takes a portion of the equity and gives you the cash as a monthly paycheck or lump sum.
Once you decide to vacate the house, you’ll still liquidate a large portion of the equity by selling the house to repay the loan. Even when you pass on, the heirs will still sell the property to clear the debt.
3. Hope of Leaving an Inheritance
Some homeowners hope to leave the property as an inheritance for their heirs. Using the home equity as security for the loan may complicate their hope if it is insufficient to clear the loan. They believe their heirs may lose the property, hence have nothing to inherit.
Is Reverse Mortgage a Bad Idea?
Many people focus on the downsides of reverse mortgages. They look at what they’ll lose and not what they’ll gain. It is human nature to magnify a problem rather than its solution.
However, the bottom line is that a reverse mortgage is a good idea if used properly. It is an effective solution to the retirement crisis that affects most seniors. Its major benefits include easy access to retirement cash, guaranteed home equity as security, and flexible payment options.