Are you approaching retirement age, or have already retired? If your income drops upon retirement, you may be considering a reverse mortgage to provide the extra cash you need for a more comfortable retirement. These home loan products come with some key benefits to consider.
What is a Reverse Mortgage, and How Does It Work?
A reverse mortgage is a home loan that lets you convert your equity into cash without having to make monthly loan payments. Instead, the reverse mortgage loan is repaid when you pass away, move out, or if you or your heirs decide to sell the home.
You must be 62 years or older, own the home, and use it as your primary residence to qualify for a reverse mortgage. There are also other eligibility criteria. You’ll be responsible for homeowners insurance, property taxes, and maintenance as long as you remain in the home.
If you’re eligible for a loan, you can opt to receive a lump sum payment or monthly installments or access the funds through a line of credit that could increase over time (depending on how much you borrow from it).
Reverse Mortgages vs. Traditional Mortgages
A reverse mortgage operates the opposite way of a traditional mortgage. Instead of you making monthly principal and interest payments over the loan term until the balance is paid in full, the lender will make payments to you based on the form of disbursement you select.
Any interest that accrues will also be added to the outstanding mortgage balance each month, decreasing your home equity over time. You don’t repay the reverse mortgage loan until you move out or pass away. Either way, the home will be sold to repay the loan, and any remaining equity will be distributed to your estate (if applicable). Or your heirs can pay off the reverse mortgage balance or refinance it if they decide to keep the home.
Pros of a Reverse Mortgage
There are several benefits of getting a reverse mortgage.
Helps With Your Retirement
Some retirees have minimal cash reserves or retirement savings but a sizable amount of equity tied up in their homes. A reverse mortgage lets them convert the equity into cash without taking on more debt.
You Can Keep Your Home
You won’t have to sell your home to access your equity. Instead, you can age in place while receiving either a lump-sum payment, access to a line of credit or monthly payments from the lender.
No Monthly Mortgage Payments
When you take out a reverse mortgage, your remaining mortgage balance (if any) is paid in full, eliminating the need to continue making mortgage payments. This perk is arguably the most significant benefit of taking out a reverse mortgage.
Guaranteed Funding for Life
You can choose the tenure disbursement, which means you’ll receive monthly payments from the lender as long as you’re alive.
Use the Funds However You Want
There are no restrictions on using the proceeds from the reverse mortgage, making it a flexible solution for retirees or individuals approaching retirement age.
No Tax Liability
The funds you get from a reverse mortgage aren’t considered taxable income or subject to federal and state taxation.
Cons of a Reverse Mortgage
Unfortunately, not everyone is an ideal candidate for a reverse mortgage, and they may not be the best deal for you.
There are Fees and Costs You Have to Pay
It’s not uncommon for reverse mortgage loans to come with higher borrowing costs than traditional home loans. Although you’ll avoid making payments on a monthly basis, the total loan balance will grow over time.
Risk of Foreclosure
You could lose your home to foreclosure if you cannot make timely homeowners insurance and property tax payments. The same applies if you don’t make HOA or CDD payments (if applicable) or fail to use the home as your primary residence.
May Impact Your Other Retirement Benefits
Some need-based government programs, like Supplemental Security Income (SSI) and Medicaid, may consider funds from a reverse mortgage when determining if you’re eligible for benefits. If you fall into these categories, you should speak to a financial advisor about this.
Your Heirs May Inherit Less
Your home must be sold when you pass away unless your heirs pay off the reverse mortgage. The amount owed could exceed the home’s value, leaving your heirs with little to no equity.
Beware of Scams and Predatory Tactics
Not all reverse mortgage lenders are reputable. It is best to speak to a financial advisor before taking out a reverse mortgage to make sure you are dealing with a reputable company.
Should You Get a Reverse Mortgage?
It depends on your unique financial situation. However, a reverse mortgage could be ideal if you want to stay in your home without making monthly mortgage payments and can afford the upkeep, including maintenance, insurance, and taxes. It also makes sense if your home continues to appreciate rapidly, and taking out a reverse mortgage won’t suck all the equity out of the property.
How to Get a Reverse Mortgage
If you decide a reverse mortgage is right for you, the next step is finding a reputable lender that puts its customers first. Consider Top Flite Financial, a full-service mortgage lender and a leading originator of these Home Equity Conversion Mortgages (HECM) backed by the federal government. It’s accredited by the Better Business Bureau (BBB) with an A+ rating and offers the following features in its reverse mortgage loan product:
- Keep ownership of your home
- Use the reverse mortgage to finance healthcare, mortgage payments or other ventures
- It’s a specialized loan for retired individuals
- Your equity is subject to the housing market
- FHA-insured HECMs are fully guaranteed and allow your non-borrowing spouse under 62 to be on title and retain all rights to the property if their spouse were to pass before them
If you want to learn more about this reverse mortgage loan product, complete the online form on this page to request a free consultation with a Top Flite reverse mortgage expert with no obligation.
