January 08, 2019
A reverse mortgage allows homeowners who are at least 62 years old to use home equity to supplement their retirement income. Reverse mortgages, also called home equity conversion mortgages, aren’t like conventional forward mortgages in that you do not make monthly mortgage payments.
Instead, as ReverseMortgageAlert.org describes, you’re responsible for “paying taxes and insurance on the property and must continue to use the property as a primary residence for the life of the loan.”
No mortgage payments. A reverse mortgage allows retirees on fixed incomes to stay in their home—with no monthly mortgage payments. The entire loan comes due at the end of the term, generally when the homeowner dies or moves out.
Immediate cash. Many families have little to no retirement savings, according to the U.S. Government Accountability Office. If you’re in a similar boat but lucky enough to have equity in your home, a reserve mortgage can help eliminate or mitigate cash flow issues that cropped up when you stopped working.
Bigger Social Security benefits. A reverse mortgage can allow you to delay drawing on your Social Security, helping you reap bigger benefits down the road. As the Internal Revenue Service lays out, you can get 100% of your benefit at age 66. But you can get 132% of your benefit if you wait to draw funds until age 70.
**High fees. **According to Reverse.Org, reverse mortgage fees are typically higher than a traditional mortgage. For example, there’s an initial Federal Housing Administration (FHA) mortgage insurance premium of 2% of the home value, up to $13,593, plus ongoing FHA premiums of 0.5% of the outstanding mortgage balance.
**Inability to move. **You may not have plans to move. But, as Investopedia cautions, if you have to move into a nursing home or assisted living facility for more than 12 consecutive months, it’s considered a permanent move. Since lenders require you to live in the home you’re borrowing against, you’ll need to pay back the reserve mortgage. If you can’t, then the lender will foreclose on your home.
Inheritance is tricky. If you’re hoping to keep your home in your family, your heirs will have to repay the loan balance. Reverse Mortgage Funding says that the loan is traditionally paid off by selling the home or refinancing through a traditional mortgage.
Reverse mortgages aren’t your only financing option as a homeowner. Unlike reverse mortgages that require you to be 62 years or older, these financing options do not have age restrictions. Plus, you don’t have to fully own your home (or have a very small mortgage) to qualify as you do with a reverse mortgage.
Home equity instruments. A home equity loan and a home equity line of credit (HELOC) are not the same thing. Although both allow borrowing against the equity in your home, the terms differ. A home equity loan is a lump sum that generally has a fixed rate while HELOC rates are usually adjustable and the amounts are smaller. Both are better suited to filling short-term financial needs.
In addition to considering your long- and short-term financial needs, you’ll want to determine the cost of borrowing, taking into account interest and fees.
Selling your home. If you sell your home, particularly if your mortgage is paid off, and move to a rental property, you can gain a significant bump to your retirement fund. Downsides include monthly rent payments and the loss of property from your estate.
**Hometap. **For many homeowners, Hometap can offer the best of all worlds. Like a reverse mortgage, a Hometap investment eliminates monthly payments. But because Hometap is an investment, not a loan, it could be the most affordable option, particularly if your home is going to depreciate in value.
Everyone hopes they’ve set aside enough money to enjoy retirement, but unexpected expenses or a longer lifespan may leave us needing additional sources of income. Carefully consider the pros and the cons to decide where your home fits into your retirement plan based on your goals and your situation.
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