What Is a Reverse Mortgage?
A reverse mortgage is a unique loan usually secured against your home equity. Unlike traditional mortgages, you do not remit monthly payments to the lender. Instead, you will receive monthly payments or a lump sum of cash from the lender to help cater for your expenses.
You can use the freed-up funds for home renovations, travel, vacations, and other purposes as you deem suitable. However, you will remain obligated to pay homeowners insurance, property taxes, and HOA as usual. Moreover, the lender expects you to repair and maintain the property accordingly.
A reverse mortgage becomes due only when the borrower passes on. Heirs are not eligible to take over the loan, meaning the lender can claim the home. Since the house acts as collateral, the mortgage can also become due when you sell the home or move out permanently.
The Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration (FHA) is the most prevalent type of reverse mortgage. Private lenders offer other reverse mortgages, but HECM is the only government-insured mortgage.
Types of Reverse Mortgages
The three reverse mortgage options available to homeowners include:
1. Home Equity Conversion Mortgage (HECM)
HECM is a government-backed FHA reverse mortgage issued under the Department of Housing and Urban Development (HUD). It is different from other FHA loans, which are essential forward mortgages. As the name implies, the mortgage allows you to convert your home equity into cash.
You have several options to access your HECM funds. These include:
- A lump-sum payment
- Fixed monthly payments
- Line of credit (LOC)
- Combination of fixed monthly payments and line of credit
Fixed monthly payments are available in two options, including the tenure and term options. The tenure option (annuity) allows you to receive monthly cash advances for the duration you live in the home as your primary residence. Term option is available for a set period as agreed with the lender.
Line of Credit (LOC) is seemingly the most popular option since it allows you to borrow money as needed. You only pay interest on the borrowed amount from the credit line, subsequently guaranteeing growth on the unused funds.
Monthly advances plus LOC is another attractive option since the lender provides steady payments, and you can access your line of credit anytime you need more money.
With so many disbursement options to choose from, accessing HECM funds can be overwhelming for any borrower. Consulting a credible financial advisor can help you make the correct decision based on your financial needs and goals.
The best part about HECM reverse mortgages is that your home equity will continue growing between 4-6% every year, no matter the prevailing economic situation. Your equity amount will increase whether the stock market crashes or interest rates rise. With this in mind, a HECM reverse mortgage may be the financial security you need to safeguard your future.
You can use HECM funds for any purpose you need. Nevertheless, meeting a HUD-approved counseling agency is advisable to help assess your financial situation and provide reverse mortgage counseling before closing the loan.
The counselor will explain everything about reverse mortgage loans, including the financial implications and your obligations.
2. Proprietary Reverse Mortgage
A proprietary reverse mortgage is similar to a HECM reverse mortgage. However, unlike the latter that has government-backing, proprietary reverse mortgages are from private lenders. This home equity loan has lenient regulation requirements and is more flexible than the federally-insured HECM.
According to the Federal Trade Commission, your home must have a value above the limit set by the FHA for you to be eligible for this reverse mortgage.
Homeowners with high-value homes with only a small mortgage balance left may consider applying for a proprietary reverse mortgage. The private lender may issue you an advance on your loan balance, which means you can access substantial amounts from your home equity in your retirement.
3. Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is a unique loan in which a municipality or government agency offers you payments in exchange for a percentage of your home equity.
Unlike other reverse mortgages, where you are free to use the funds however you want, single-purpose reverse mortgages demand that you use the loan for a particular purpose as approved by the lending agency.
For instance, the municipal may offer homeowners in your neighborhood single-purpose reverse mortgages if you need a new sewer system built in your area. The loan beneficiaries do not have to repay until they sell their properties.
Single-purpose loans allow homeowners to enjoy renovations and upgrades without paying for them upfront from their savings. This arrangement is ideal for homeowners with limited income who may need to upgrade their homes for improved quality of life and livability as they age.
Who Should Apply for a Reverse Mortgage?
Gone are the days when a reverse mortgage was a preserve of insolvent, low-income homeowners seeking a fast cash injection to cater for their expenses.
If you are 62 years or older, either working or retired, you can benefit immensely by applying for a reverse mortgage.
Social Security is quickly becoming overwhelmed. With improved life expectancy and quality of life, people now live longer, spend more money, but save less. However, this trend can adversely affect Social Security and retirement investment programs, meaning it is just a matter of time before trust funds run out.
Moreover, healthcare costs are rising while tax rates are increasing every day. Baby boomers with savings may have it all wiped out to take care of these emerging needs. With this in mind, consider taking up a reverse mortgage to safeguard your financial future.
If you own a home, which happens to be your primary residence, you can make good use of it by taking out a reverse mortgage against your home’s equity. The money you get can boost your savings and see you through retirement.
It is sensible for working seniors to take out reverse mortgages and start repaying early for the first few years. Doing so will increase their equity and grow their credit line. A reverse mortgage can be an enormous boost to your retirement plans, no matter your savings.
Why Consider a Reverse Mortgage?
The benefits of taking out a reverse mortgage are almost uncountable, but the three primary reasons you should consider this loan include:
The main reason to take out a reverse mortgage is the cash injection. A reverse mortgage gives you access to cash even if you have limited liquid assets. The amount of money you can borrow depends on your home’s equity.
If you have a lot of equity, you can apply for a substantial amount of cash and receive it as a lump sum, monthly payments, or line of credit.
You may use cash from a reverse mortgage to cover healthcare expenses, purchase home equipment, pay off debts, or supplement your current income.
Considering the escalating tax burden and healthcare costs, taking out a reverse mortgage is essential for your financial security. You may think you have adequate savings in your reserves, but this might not be enough to cover your retirement plans.
No matter how much you have in savings, a reverse mortgage can be a vital part of your retirement plan. It can help boost your cash flow without you having to sell your home or pushing you into a higher tax bracket.
Improved Quality of Life
Everyone wants to experience the finer things of life. However, debts and limited liquid assets can impede you from enjoying the quality of life you deserve during your twilight years.
Since HCEM reverse mortgages do not have any restrictions on spending your money, you can utilize your funds to enjoy various lifestyle enhancements. You can go on vacation, buy a new car, treat your family, or renovate your home.
Then again, you have the option to choose if you want a lump-sum payment, monthly advances, or line of credit. Monthly advances can bolster your cash flow if you are on a fixed income.
Reverse Mortgage For Retirement Planning
A reverse mortgage can act as an excellent retirement benefit. It takes away the burden of relying on your savings for all your expenses. It also offers financial security by freeing up cash and reducing your tax obligations.
Here are a few ways a reverse mortgage can bolster your retirement strategy:
Unlike a traditional mortgage, you do not have to remit monthly payments to repay your reverse mortgage. With no monthly debt obligations, you will have extra cash to supplement your current income and cover your everyday expenses. The only financial commitments you have to pay are your home insurance and property taxes.
Improved Quality of Life
A reverse mortgage creates a sense of financial security, and you can use the extra funds to improve your quality of life. Whether you require money for long-term care or you want to upgrade your home in line with your emerging needs, a reverse mortgage gives you access to funds to cater to these requirements.
Reduced Tax Obligations
As tax rates continue to rise, a reverse mortgage can help reduce your tax burden in several ways. First, reverse mortgages are not taxable income, meaning you can borrow from your line of credit or receive monthly advances without expecting to pay tax on these amounts.
Then again, relying on non-taxable cash sources means you remain in a lower tax bracket, which goes a long way to reduce your overall tax burden.
Extends Retirement Investments
Access to extra cash and having a line of credit can allow your retirement investments to grow immensely. Having monthly cash advances also means you are less likely to make large withdrawals from your investments, subsequently keeping your taxable income low.