(Mar 27, 2023)
But don't panic just yet. It turns out that rising interest rates don't necessarily impact reverse mortgages like other loan types. They also don't reduce their potential benefits enough to deter you from taking one out.
Note that when interest rates go up, your mortgage payments will increase as well. Fortunately, you can rest easy knowing that there are many reasons to consider a reverse mortgage safe to use even with higher interest rates. This article will discuss why reverse mortgages are still secure with rising interest rates. Read on to discover more!
Stability
A reverse mortgage has been around for over 30 years and does not appear to be going anywhere. If rates ever go up, you won't have to worry about your investment suddenly tanking because it was tied to low-interest rates.
In most cases, rising interest rates can increase your cash flow from a reverse mortgage. You should also know that most lenders will allow you to prepay or sell your home at any time (as long as it is sold at market value). So even if rates rise substantially in future years, there will still be plenty of opportunities to make adjustments.
Borrow Against Your Home's Equity
A reverse mortgage allows homeowners who are 62 years or older to borrow against their home's equity. The amount you receive from your lender is based on your age, your home's value, and its equity amount. And because it comes from your house's equity rather than its principal, there are no taxes on interest earned through a reverse mortgage.
As long as you continue to live in your home, you don't have to make additional payments. However, there are limits to how much equity you can tap into, and if your house doesn't have enough equity to satisfy those limits (or if it has zero equity), you may not be able to get a reverse mortgage.
It Allows You To Stay in Your Home
A reverse mortgage can provide a much-needed income stream for retirees struggling to make ends meet. And it allows you to stay in your home and live independently for as long as possible, meaning there's no need to sell your house or downsize. So if rising interest rates are scaring you away from reverse mortgages, don't let them!
With the benefit of staying in your property while still enjoying the reverse mortgage fund, it's clear why these loans make sense even when interest rates rise This is a valid reason why you should always consider it an option before selling your home or moving into an assisted living facility.
You Can Use the Money for Any Purpose
Some people are under the impression that reverse mortgages can only be used for housing-related costs. The truth, however, is that you can use your reverse mortgage proceeds for a wide range of things and everyday living expenses.
It provides you with peace of mind knowing you have cash on hand to fund your bills and allows you to live freely without worrying about selling or downsizing your home during retirement. Below are several examples of ways you can utilize your reverse mortgage funds:
Paying Medical Bills
Most reverse mortgage options allow you to use your loan money toward medical expenses. Most people only consider paying for long-term care or nursing home expenses, but there are other ways that you can use your reverse mortgage funds for healthcare expenses. For example, some states allow you to purchase approved prescription drugs with their loan proceeds.
Home Improvements
If you have been thinking about any home improvements but don't have enough funds, a reverse mortgage can help you achieve that dream. Whether adding on an extra room or remodeling your kitchen, these loans can be used for anything. The only limit is your imagination! So if you are looking for ways to use your money wisely and improve your home simultaneously, consider using a reverse mortgage loan.
Emergency Fund
A nest egg can be an invaluable resource when you're in your retirement years. A financial emergency can put undue stress on your savings if you don't have a rainy day fund from a business or family trip to an illness to car repairs. The good news is that you can use your reverse mortgage cash for any emergency purpose.
Travel
You need to have enough money saved up for emergencies and other costs associated with owning a home when you take out your loan, like property taxes and homeowner's insurance. One of the great benefits of reverse mortgages is that you can use your funds for living expenses, such as travel. If you're planning a trip or two in retirement, a reverse mortgage could be an excellent source to fund those excursions.
Pay Debts
The mortgage allows you to pay off debts, either with lump sums or over time. You don't have to sit and watch your debts pile up after receiving a reverse mortgage. Instead of paying interest on these debts for years, use your reverse mortgage funds to eliminate them.
Auto Repairs
Your reverse mortgage can cover auto repairs, maintenance, and upgrades. Upgrades can include new tires, brakes, windshields, and even electronics like GPS systems or DVD players. The loan doesn't have to be used only for your car. It can also be used for any vehicle you regularly drive—such as a friend's or relative's car if you don't have one of your own.
Fund Your Child's Education
You can use your reverse mortgage loan for education funding. This is excellent news for parents and children who may have trouble affording a college degree. You can get money for your child's tuition or other education-related expenses with a reverse mortgage. Most financial aid offices don't consider these funds an income, so they won't affect your child's ability to receive grants or student loans. If you plan on using your reverse mortgage loan for educational purposes, you must understand how much money will be available. It'll help you make an informed decision about whether or not it's right for you.
No Monthly Payments and Hidden Fees
A reverse mortgage has no monthly payments and no hidden fees. The loan balance will be paid off at your death if you sell your home or refinance it, or move out permanently, whichever comes first. And because it does not require monthly payments or any upfront costs, a reverse mortgage makes it easier for seniors who can't afford to make payments on their homes to maintain them. You can comfortably use a reverse mortgage to pay for home repairs and debts, including medical bills and credit cards, without worrying about how to cover them later on down the road.
One of the most common misconceptions about reverse mortgages is that they have hidden fees. There are no fees in addition to your loan balance that you don't pay off at any point. The interest rate on your mortgage is set for life, so you never have to worry about additional charges or penalties. Also, there are no prepayment penalties, so no extra costs will be incurred if you decide to sell your home or use some of its equity before you die.
No Credit Score Check
With many loans and lines of credit, you'll have to prove your income and assets, which can sometimes be difficult if you're retired. However, with a reverse mortgage, there's no credit check needed—you'll need to pass some basic underwriting guidelines that include age, health status, and debt-to-income ratio.
The no credit score requirement is a significant reason older Americans embrace these loans as an alternative to selling their homes and downsizing. Even if you have some debt or your home value has fallen below what you owe on your mortgage, a reverse mortgage might be worth considering—especially if rising interest rates have made it difficult to refinance or sell your home.
Federal Insurance
All reverse mortgages are insured by the Federal Housing Administration (FHA), which means they're backed by government insurance, so you don't have to worry about future surprises on your mortgage. This means that your home and assets are protected from foreclosure or other problems related to loan repayments.
Many seniors who take out reverse mortgages worry about losing their homes if they can't make their monthly payments. However, these mortgages are designed so that they cannot result in default. If interest rates rise or home prices fall, you won't be responsible for paying more than what your home is worth. This can make it easier to sleep at night—and focus on enjoying life in retirement!
A reverse mortgage can provide you with a steady income stream and financial flexibility in your later years. It's easy to see why many seniors consider taking out reverse mortgages despite rising interest rates. The benefits are relatively numerous! Here are some of the top benefits of government-backed reverse mortgages you can look forward to enjoying in your retirement years:
Avoid Foreclosure
One reason homeowners choose a reverse mortgage is that it can keep them from going into foreclosure. Unlike traditional mortgages, reverse mortgages are paid out when a homeowner dies or sells their home. This happens after any existing loans have been paid off, so funds from a Reverse Mortgage will not count against them if they go into foreclosure. If you think you might fall behind on your mortgage payments at some point in your life, a government-backed reverse mortgage could help keep you and your family out of foreclosure trouble.
No Risks
If you fail to make payments, your home is at risk with a traditional mortgage. But with government-backed reverse mortgages, your home isn't at risk. So, regardless of how long you live in it or what happens in terms of income or expenses. You don't have to worry about defaulting on your mortgage.
Free Access to Guaranteed Cash
A government-backed reverse mortgage can be an attractive option if you need some cash for retirement but don't want to sell your home or other assets. Getting a reverse mortgage is free and quick because it doesn't require any down payment, monthly payments, or strict credit checks.
Pre-loan Financial Counseling
Before applying for any reverse mortgage, it's crucial to go through pre-loan counseling. Under federal law, every potential homeowner planning to use a reverse mortgage must receive pre-loan counseling before the lender approves them and begin receiving payments. The counselor will walk you through what happens when you receive loan proceeds and other general information about reverse mortgages. It's in your best interest to undergo counseling to know what to expect and feel confident about your decision moving forward.
Counseling services are provided by HUD-approved counseling agencies. There are three types of counseling: basic, intermediate, and comprehensive. Please call your nearest HUD-approved housing counseling agency to see if you qualify for these service levels. In addition to in-person counseling sessions at an agency's office, lenders may use a telephone or the internet to provide pre-loan financial counseling to borrowers. Most housing counselors charge no service fees.
No Taxes On the Income
The most significant advantage of a reverse mortgage loan is that you receive monthly payments that aren't subject to income tax or can take out one lump sum in a single tax year. Just like any loan, there may be a tax liability when you eventually sell your home, but you'll never have to pay taxes on the amount you receive from your lender as long as you live in your home.
Your Heirs are Protected
You can continue to use or enjoy your home during your lifetime and leave it all behind to your heirs when you pass away. Your family won't have to worry about making monthly payments on time or facing balloon mortgages to make ends meet. These problems are all eliminated as soon as you execute a reverse mortgage. This peace of mind for you and your loved ones makes reverse mortgages extremely valuable for anyone who wants to ensure their family's financial security after they're gone.
If you have a traditional home loan on your house, your heirs might have to sell it to pay off your remaining balance. However, if you've used part of that mortgage money to invest and amass assets, your heirs will also get to keep them. This can give them more control over their future instead of having to sell everything they've inherited.
The Entire Loan Balance Can Be Forgiven at Death
In some cases, a reverse mortgage loan can be forgiven upon death, so you don't have to worry about your heirs having to pay off your loan. It's likely to be ignored if you pass away while still owing money on your loan. This can help reduce financial stress on your family members after you pass away. There are two types of loans that allow for forgiveness upon death: FHA loans and VA loans. If you have an FHA or VA loan, it's essential to determine whether or not forgiveness of your loan is possible before taking out a reverse mortgage.
No-hassle Loan Procedure
Compared to traditional mortgages, which can be long and stressful, reverse mortgages are quick and relatively hassle-free. You won't need to fill out paperwork about your income or assets for a reverse mortgage. As long as there are no mortgage payments due, it's never too late to consider taking out a reverse mortgage, even if interest rates increase.
Applying for a reverse mortgage is relatively simple; you can complete an application online or over the phone. Just check in with your lender once every six months (or annually) to ensure that you still qualify for your loan. Your lender will determine how much money you are eligible for based on your age, current income level, and the value of your home.
Bottom Line
If you're still wondering if reverse mortgages are safe, you're not alone. Rising interest rates and the recent Tax Cuts and Jobs Act of 2017 have many people wondering if it's still safe to tap into their home equity. The truth is that reverse mortgages are safe because they aren't credit-based loans, and they don't have to be repaid until the homeowner dies or moves out of the house entirely. A reverse mortgage can allow you to keep your home no matter what happens with interest rates, taxes, or even another housing crisis like we saw in 2008.
(Mar 27, 2023)
