A reverse mortgage is a special type of loan that some older homeowners can take out. This loan allows them to access their home equity and receive cash payments, either as a lump sum or in installments over time. Many seniors turn to a reverse mortgage loan in retirement to bolster their income, and they can use this money to maintain their home, pay for healthcare, or cover any other costs in their lives.
If used under the right circumstances, the money you receive from a reverse mortgage can provide you with a greater degree of financial freedom in retirement. So is a reverse mortgage right for you? In this article, we’ll take a look at four major benefits of a reverse mortgage loan.
What is a Reverse Mortgage?
A reverse mortgage loan allows homeowners to borrow money by tapping into their home equity, and using their home as collateral for the loan. This means, essentially, that you’re able to borrow money without having to make monthly principal and interest payments. It can be a great way to improve cash flow and, since there are very few restrictions on how to spend the money you get from the loan, you can use it to pay for a wide range of costs and expenses.
One of the most unique aspects of a reverse mortgage loan is that there’s no set due date for when you have to pay back the money. While you can make payments on the loan at your convenience, the total balance of the loan only becomes due once you sell the home, move away, or die.
Who Qualifies for a Reverse Mortgage?
To qualify for a reverse mortgage, you generally have to be 62 or older and must either own your home outright or have a considerable amount of equity in the house. The exact amount of home equity you need varies depending on the lender you’re working with, but as a rule of thumb you should have at least 50% equity in your home to take out a reverse mortgage loan.
A reverse mortgage can be a useful tool depending on your own financial situation. For example, if any of the following statements apply to your situation, then a reverse mortgage may be for you:
- Most of your net worth is tied up in your home
- You’re in need of cash and don’t have other sources of income
- You don’t plan on ever leaving your home
Benefits of a Reverse Mortgage
Reverse mortgage loans offer borrowers a variety of benefits. Under the right circumstances, it can be a very powerful tool that allows you more freedom and flexibility in your finances. Here we’ll take a look at some of the main benefits that come with a reverse mortgage loan:
#1: Increased Cash Flow
When you stop working and retire, you typically lose your main source of income. However, your other expenses, such as your mortgage, utilities, insurance, maintenance costs, and so on generally stay the same. If you don’t have an ample savings account, this can create a situation where you feel stressed out or overwhelmed by these costs.
A reverse mortgage allows you to pull money you wouldn’t normally be able to access out of your property. This supplies you with an income stream that can help you more comfortably manage your expenses in retirement.
#2: No Monthly Mortgage Payments
As a homeowner, you won’t have to make monthly mortgage payments on a reverse mortgage. That’s because a reverse mortgage, unlike a traditional mortgage, doesn’t require the homeowner to make any loan payments. Instead, payments are made to you for the length of time that you continue to live in your home.
The total balance of the loan only becomes due once the borrower sells the home, permanently moves to a different home, or dies. However, it’s very important to keep in mind that a reverse mortgage doesn’t let you off the hook for costs like home insurance and property taxes.
#3: Protection Against Decline in Housing Market
A reverse mortgage loan is insured by the federal government, and this provides you with a great deal of security. It means that if the value of the reverse mortgage loan exceeds the value of your home when that loan comes due, the federal government will take care of the difference.
So, with a reverse mortgage, you won’t ever have to worry about owing the lender more than your home is actually worth, even if the real estate market tanks and negatively impacts your home’s value. Additionally, if, in the future, you or your heirs want to pay off the entirety of the loan and stay in the home rather than sell it, you wouldn’t be required to pay more than the value of the home.
#4: Flexibility in How You Receive Payments
With a reverse mortgage, the loan payments made to you can be disbursed in a few different ways. The methods in which you can be paid include:
- Lump sum. In this case, you’d get the full amount of the loan in a single payment. You can receive a full or partial lump sum once your loan has been approved.
- Equal monthly payments. This means that as long as at least one borrower lives in the home, the lender will continue making steady monthly payments to them.
- Term payments. The lender will issue even monthly payments over the course of a term set by the borrower.
Taking out a reverse mortgage is a big decision and it can often be pretty confusing for the average person to understand and navigate. While it provides a number of major benefits, it also has its downsides. There are certain fees that come with a reverse mortgage, the amount you’re required to pay back grows over time, you’re still responsible for other home-related expenses, and you lose home equity as your loan balance increases.
That’s why, if you’re considering taking out a reverse mortgage, it’s important to consider all of the pros and cons. Do some research and weigh the benefits listed above against the potential drawbacks. If you’re still unsure, consider consulting with a financial planning professional to see if a reverse mortgage can help you in retirement.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. He is currently a contributing editor for 365 Business Tips. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.