Securing a reverse mortgage from a mortgage broker may be a crucial step to successful retirement planning. A reverse mortgage allows older homeowners who have paid off their mortgage to leverage their home’s equity as tax-free income without having to sell their home. This is a great way to acquire retirement funds which will be extremely valuable in the future. However, it might not necessarily be the right option for everyone, and it might also not be the right time for you to get one. If you’re considering a reverse mortgage, here’s what you need to consider when figuring out if it’s the most suitable choice for you.
What is a reverse mortgage?
A reverse mortgage is a loan available to homeowners aged 62 years and older who have already paid off their mortgage. Older homeowners often use this type of mortgage to pay for their medical expenses or to supplement their monthly pension. Unlike a typical mortgage, the lender in this situation is the one who pays the borrower, as opposed to the other way around. This allows homeowners to take advantage of their home’s equity without having to sell their property. The borrower won’t need to make monthly payments, and they only need to repay the loan if they choose to sell the home, permanently move out of the property, or when they pass away.
Kinds of reverse mortgages
- Proprietary Reverse Mortgages. These are private loans with large advances offered for homes with a high appraised value. If you have a low mortgage and a high-valued home, then you may be qualified for more funds.
- Single-purpose Reverse Mortgages. These loans are provided by non-profit organizations, as well as state and local government bureaus, although some areas may not offer them. This is the most affordable alternative available to low to average income. The only drawback to these types of loans is that they can only be used for a single purpose, which the lender will stipulate.
- Home Equity Conversion Mortgages (HECMs). HECMs are insured by the Federal Housing Administration (FHA) and endorsed by the U.S. Department of Housing and Urban Development (HUD). Unlike single-purpose reverse mortgages, they can be utilized for just about any purpose.
When should you get a reverse mortgage?
- Low-interest rates. Low-interest rates mean you may get more money out of a reverse mortgage.
- High housing prices. When your home’s appraised value is high, then you’re eligible for a higher loan amount. Applying for a reverse mortgage is ideal as soon as housing values go up throughout the country.
- You actually need the money. If you’re in need of money in a short span of time, then you should consider applying for a reverse mortgage. It’s also a great way to enhance your daily life in retirement, whether that be by funding the remodeling of your home, increasing your monthly spending limit, or helping pay for out-of-pocket medical expenditures.
- You’re older. The older you are, the more eligible you are for a reverse mortgage, and the bigger your advances will be if your home’s value has appreciated over time.
- You have no intention of selling your home. Some people want to sell their homes and move into a nicer home during retirement. However, if you’ve decided that you want to remain in your home forever, then you may want to consider getting a reverse mortgage.
- You’ve paid off your mortgage. With a mortgage paid off, you can allocate all the money you get from a reverse mortgage for any purpose — from funding a vacation to remodeling your house. You can still apply for a reverse mortgage even if you have an existing mortgage though. If you do have one, your debt will be automatically paid off with a reverse mortgage, but you won’t be able to receive any returns.
- You need a contingency plan. The money you get from a reverse mortgage can serve as a financial contingency plan if you need to save for a rainy day.
When should you avoid a reverse mortgage?
- You intend to move away at some point. The average term of a reverse mortgage is seven years. If you intend to move away before you completely pay off the cost of the loan, then this option may not be the best option for you.
- You want to leave your successors with an inheritance. Since you still own your property even when you apply for a reverse mortgage, your home can still be passed down to your successors when you pass away. However, the remaining balance on the mortgage will also be passed down to them. If you intend to bequeath an inheritance to your heirs and not debt, then you should hold off on getting a reverse mortgage.
Ultimately, the decision to get a reverse mortgage depends on you, but hopefully, this information will help you make the most informed choice.