What to consider when considering a reverse mortgage
A trend on the rise in home ownership as of late is the concept of reverse mortgages. This financial strategy is getting more and more common, as homeowners begin to use the equity of their home as a loan. But what exactly is a reverse mortgage, and how does it work? Let’s examine the concept of a reverse mortgage, and the benefits and downfalls that are included in its’ use.
What is a reverse mortgage?
A reverse mortgage is a loan that allows you to receive money from your home equity without having to sell your home. Typically, you are able to borrow up to 55% of the current value of your home, tax-free. There are however, qualifications that must be met in order to have a reverse mortgage. These qualifications include being a homeowner, that is minimum of 55 years of age. This includes the spouse of the homeowner as well, meaning both individuals must be a minimum of 55 years of age to be eligible for a reverse mortgage. Your lender will then consider your homes current value, where you live, the current interest rates, and your age prior to approval. Typically, the older you are and the more equity in your home, the larger your loan will be. There are multiple ways in which you can receive the money from your loan, however you must first pay any outstanding loans that are secured by the equity in your home with these funds.
Benefits and Downfalls:
There are multiple advantages to accessing the equity in your home as a loan. Firstly, a reverse mortgage is a good way to use the loan for home improvements, to cover healthcare expenses, or to add to your retirement income. The older you are and the more equity in your home you have. This means, the larger your loan. Some individuals can use this option for travel, family education costs, etc. the possibilities are endless. Additionally, this option gives the mortgage holder the financial flexibility and freedom to do things that need to be done. There is also no need to stress about making payments onto a reverse mortgage. The option exists to repay the principal and interest at anytime. A major advantage considered with having a reverse mortgage is that you are in control of your home, and it ensures you have access to that money whenever you want it, tax free, up to 55%. A major advantage of this kind of loan is that it is not counted as income when determining eligibility for Old-Age Security or Guaranteed Income Supplement benefits. You can continue to use a reverse mortgage as long as your home is your primary residence, and upon your death, your estate repays the loan. The maximum you can ever owe is the fair market value of your home; meaning if you die or move, you can never owe more than the house is worth.
However, as with any loan, there are still downfalls regardless of all the advantages of a reverse mortgage. Primarily, the interest cost charged on reverse mortgages are high. This is due to the fact that lenders are advancing you money with no payments, and no time restrictions. With no time period or date specified to recover their principal and interest, it is understandable why these mortgages have a high interest rate. Because it is a negative amortization, the loan continues to increase. This creates a secondary downfall of minimizing the equity in your home, and increasing the amount due by your estate after death. There is the additional consideration of application fees, legal fees and closing costs associated with a reverse mortgage being a larger expense to incur as well, however these fees could be paid using the loan once approved.
As with any type of loan, there are always benefits and downfalls. A reverse mortgage is designed to give homeowners their financial freedom, especially now as a vast majority of society are house-rich, cash-poor. The generation of baby boomers have the majority of their assets tied up in their homes, which minimizes their freedom when it comes to retirement and financial needs/situations. A reverse mortgage can be a beneficial way to access needed funds through the equity of the home that boomers have spent their lives working for, ensuring that these individuals maintain control of their home and are not in a situation where they must sell or move. In the end, the ability to repay the principal and interest at anytime allows individuals the flexibility to use their equity where it is needed most, and know that they won’t need to repay more than fair market value. When considering a reverse mortgage, it is essential that one review all their financial aspects to ensure that this option is right for them. Reverse mortgages are giving people their financial freedom back, without the added risks of typical loans.
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