Improve Quality Of Life
And then you dont necessarily have to be struggling to make ends meet to consider a reverse mortgage either. You could take out a line of credit in case you encounter unexpected expenses, use it for Christmas gifts for your grandkids or for travel, or for whatever you choose.
You can use a little and keep your costs down with the HECM line of credit to preserve equity for family and heirs or if you dont have any children or heirs and dont have a plan for your home for after youve passed, then a reverse mortgage could simply be used as a way to improve the quality of your life in your retirement years.
Its entirely up to you. So while a reverse mortgage isnt universally a good idea for everyone, there are plenty of situations and circumstances where getting one of these types of loan could have a positive impact on your life.
Advantages Of A Reverse Mortgage
If youre looking to tap into your equity to pay off debt or tackle some home improvement projects, a reverse mortgage is generally easier to qualify for than a traditional home equity loan or line of credit. Typically there are no minimum income or credit score requirements that you have to meet. Additionally, you may be able to get a better interest rate than you would wind up with with another type of loan.
Homeowners are allowed to retain the title to the home with a reverse mortgage. This means you can pass it on to your children or other heirs after your death. If you end up moving, you can still receive any leftover equity if you sell the home for more than the amount of the reverse mortgage. The same is also true for your beneficiaries, as they wont be responsible for any equity shortfalls if your home loses value. As an added bonus, you may qualify for the mortgage interest deduction, which can help offset some of your tax liability.
Reverse mortgages also offer some flexibility in how you can receive your payments. Depending on the lender, your choices may include fixed monthly payments, a lump sum payout or a line of credit. You may even be able to combine more than one of these payment options to help meet your specific needs. If youre already receiving Social Security or Medicare benefits, reverse mortgage payments wont impact your eligibility.
Why A Reverse Mortgage Loan Should Be In Your Retirement Plan
A reverse mortgage is no longer a last resort option for retirees. Experts explain how it can be a valuable source of retirement income.
Based on research from leading reverse mortgage professionals Harlan Accola and Dan Hultquist
A couple of decades ago, reverse mortgages were the ugly stepsister of mortgages. A loan of last resort for retirees who badly needed money.
These days? A reverse mortgage is no ugly stepsister. In fact, reverse mortgages are the Cinderella story of home loans. And if youâre 62 or older, this is one mortgage youâll want to take to the retirement ball.
Reverse mortgages give you options: to free up more cash month to month, renovate your home, or even buy a new one. Importantly, they can also help lower your tax burden and extend your investment savings*.
So forget everything youâve heard about reverse mortgages, and allow us to reintroduce you to this strategic home loan option.
What’s in this Article?
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Reasons To Consider A Reverse Mortgage
Here are three key reasons someone might consider a reverse mortgage, according to Dan Hultquist, author of Understanding Reverse: Simplifying the Reverse Mortgage.
Access to cash
If youâre house rich but cash poor â meaning you have limited liquid assets but a lot of equity in your home â a reverse mortgage allows you to take money out of the home and ease your financial constraints.
You might use some of your equity to pay off other debts or pad your monthly budget. Or, you can also use the money to cover medical costs, such as home equipment, renovations to age in place, or to pay for in-home care.
Lifestyle enhancements
A HECM allows you to use your reverse mortgage funds however you want. Whether thatâs to renovate your home, buy a new car, or treat your family to a once-in-a-lifetime vacation, the choice is yours. Receiving monthly payments can also provide a buffer for your day-to-day expenses, especially if youâre on a fixed income.
Financial planning
Weâll discuss this in the next section. A reverse mortgage can become a crucial part of your retirement planning and can bolster your cash flow without pushing you into a higher tax bracket.*
Reverse Mortgages: The Good And The Bad
By Family Caregiver Alliance Kathy, age 59, hates to see her mother Betty struggle with financial constraints. Since Bettyâs husband passed away five years ago, her household income has been cut in half. Kathy sees her mother struggling to pay for utilities, medication, food and other household expenses on her reduced income. While Kathy helps as much as she can, she has her own family and career to manage.
Kathy is now helping her mother investigate the benefits and risks of a reverse mortgage to provide additional income. Reverse Mortgages were originally designed as a âlast resortâ type of loan to provide additional cash flow for seniors aged 62 and older who owned their own home. However, reverse mortgages have become increasingly popular with younger seniors using the cash to subsidize retirement income or to help pay for long-term care expenses. According to AARP, about fifty percent of the people applying for reverse mortgages in todayâs market are under the age of 70.
The Benefits: For a senior like Betty, a reverse mortgage could provide cash flow from the bank, based on the equity in her home either as a lump sum or line of credit. As long has she remains in the home, no payment is due on the loan and the additional cash can be used as needed. As part of receiving the loan, Betty will need to continue paying her property taxes and house insurance, and has to keep the house in good shape.
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Bottom Line: Should You Get A Reverse Mortgage
Reverse mortgages have gained a less-than-perfect reputation thanks to some scams that target unsuspecting seniors. Even legitimate companies have used dishonest marketing to try to get homeowners to take out reverse mortgages: In late 2021, the Consumer Financial Protection Bureau filed a complaint and levied a $1.1 million fine against American Advisors Group, one of the biggest names in reverse mortgages, for deceptive marketing.
So, the simple rule is: Be very, very cautious about putting your home at risk.
Still, there is one key reason that seniors might consider examining their reverse mortgage options today, and that is elevated equity. Over the past few years, home equity has grown as home values have skyrocketed. The average American homeowner gained more than 27 percent home equity between Q2 of 2021 and the same period in 2022, according to CoreLogic. According to the latest data, the average borrower now has just over $60,000 in equity available.
Remember that you have other options to access cash, too. Compare a home equity loan versus a reverse mortgage to see which one is a better fit for your needs.
With additional reporting by David McMillin and Meaghan Hunt.
Talk To A Mortgage Expert You Can Trust
Before you make any decisions on a reverse mortgage, speak with an expert who knows the ins and outs of everything to do with mortgages. Our trusted friends at Churchill Mortgage will equip you with the information you need to make the right decision.
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.
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The Interest Rates On Reverse Mortgages Are On The High Side
The saying if it seems too good to be true, then it probably is can sometimes apply to reverse mortgages. Firstly, its a loan and not free cash. The interest payment on reverse mortgages is also significantly higher than you would pay on an average mortgage. Interest rates above 5% are basically the norm for this type of financial product.
Some Lenders Use High
The first thing you should know is that reverse mortgages have a reputation for attracting predatory practices and lenders. Some seniors have been targeted with high-pressure sales tactics on reverse mortgages. You should be especially skeptical if a salesperson gives you suggestions about how to spend the money from your reverse mortgage, particularly if they suggest putting the money into another financial product.
That doesnt mean that a reverse mortgage is always a bad idea, though. For many people, a reverse mortgage can be a good way of providing themselves with a regular, dependable income in retirement. Just make sure you understand all of the complexities of the mortgage you take out.
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What Is A Reverse Mortgage
A reverse mortgage is a lending option that lets homeowners whoâve paid off all or most of their mortgage to tap into their home equity. Reverse mortgage funds, which are only available on primary residences and typically people over the age of 62, are structured as lump sums or lines of credit that can be accessed on an as-needed basis.
With a reverse mortgage, an eligible homeowner borrows money against the equity in the home. The interest accrues on a monthly basis, and the loan doesnât need to be paid off until you move out or pass away. Instead, accrued interest is added to the loan balance so the figure compounds every month.
If the homeowner moves out before the loan is repaid, there is a one-year window to close out the loan. If the borrower dies, the estate must pay back the loan, but not more than the value of the house.
There are three types of reverse mortgages:
Reverse mortgages often come with high fees and closing costs, and a potentially costly mortgage insurance premium. For loans equal to 60% or less of the homeâs appraised value, this premium typically equals 0.5%. However, if a reverse mortgage exceeds 60% of the homeâs value, the premium can increase to 2.5% of the loan amount.
Potential Upsides To A Reverse Mortgage
Having regular monthly income in old age is a benefit. Reverse mortgages allow you to access what might be your largest asset — the equity in your home — which would otherwise be virtually untouchable. After all, everybody has to live somewhere. Unless you’re willing to live life in an RV, you probably won’t sell your home and put the cash in your checking account. Plus, if you did, you might open up a can of tax worms. A reverse mortgage helps you get that cash without negative tax consequences .
If your retirement income is too low to cover all of your financial obligations, a reverse mortgage could help you afford to stay in your home by providing you with funds to pay your property taxes and maintenance expenses.
Some financial planners consider a reverse mortgage to be a good strategy for maximizing assets that you can leave to your heirs. The reasoning is that money you withdraw from some retirement accounts is taxed as income. On the other hand, the money you receive from a reverse mortgage is not taxable. So if you can live on reverse mortgage proceeds and preserve your retirement savings, you might end up leaving more money to your heirs.
Finally, if leaving your home to someone after you die is not a priority for you, a reverse mortgage is a good way to get the full benefit of your home equity while you are still living.
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What Dave Ramsey Doesnt Tell You
Finally, the one thing that Dave doesnt tell you is that although there are no monthly mortgage payments due on a reverse mortgage, there is never a prepayment penalty so you can make a payment in any amount at any time without penalty.
This means that if you take out a reverse mortgage and then have a change of heart, you can simply make a lump sum payment to pay off the loan in full without having to worry about any penalties.
Of course, this is also true of traditional forward mortgages but its something that Dave Ramsey doesnt mention when hes talking about reverse mortgages.
Determine If A Reverse Mortgage Is A Good Idea With Radius
Whether or not a reverse mortgage is a good idea depends on an individual homeowners situation and how they intend to use the funds.
Although exploring these scenarios is helpful, you cant know if a reverse mortgage is the best choice for you without the help of a trusted Loan Officer. A Loan Officer from radius can determine whether a reverse mortgage will work for you by looking at your finances, current income, and financial need.
If you would like to know more about reverse mortgages, connect with us today.
* This guide is for educational purposes only and should not be construed as financial advice. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Not tax advice, consult a tax professional. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and insurance. The borrower must maintain the home. When the last borrower or eligible non-borrowing spouse passes away, sells the home, permanently moves out, or fails to comply with the loan terms, the loan becomes due and payable . Reverse mortgages are currently not available in NH and TN with radius financial group, inc.
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Types Of Reverse Mortgages
Most reverse mortgages are government-insured loans. Like other government loans, like USDA or FHA loans, these products have rules that conventional mortgages dont have, because theyre government-insured. These include eligibility criteria, underwriting processes, funding options and, sometimes, restrictions on uses of funds. There are also private reverse mortgages, which do not have the same strict eligibility requirements or lending standards.
Downsides Of A Reverse Mortgage
Since a reverse mortgage is technically a loan, youll have to cough up some money for origination and application fees. Interest rates also tend to be higher than a conventional mortgage since the lender is assuming a larger amount of risk. If you hold substantial equity in your home, these fees can easily add up to become a major expense. If the lenders also charging a high interest rate, you may not actually get much benefit out of it.
Applying for a reverse mortgage can also have an impact on your ability qualify for Medicaid coverage, which is need-based. One of the things that determines whether youre eligible for Medicaid is the total amount of assets you have. Some states allow you to exclude some or all of your homes value. However, there are specific limits on how much you can have in your bank account. So if you park the cash from your reverse mortgage in your bank account, your application may get denied.
Residency requirements are also an issue with reverse mortgages. For example, if you end up moving into a long-term care facility, youll have to repay the loan in order to keep the property. You also need to think about the potential impact on your heirs. If they cant come up with the money to pay off the reverse mortgage after you die, they have to sell the home. They can use other estate assets to clear the loan and keep the property but this diminishes the amount of their inheritance.
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Should You Get A Reverse Mortgage
At its core, a reverse mortgage allows for an infusion of cash into your financial life during a sometimes tumultuous time: retirement. Therefore, if youre in need of some extra money, this type of loan is well worth looking into. The money paid out through a reverse mortgage is often tax-free. That makes it a relatively simple way to ease your monthly budget without taking on too many extra costs.
You may go through the reverse mortgage application process and find that the associated fees are quite high. If this describes your situation, you should likely steer clear of a reverse mortgage. There are other options for gaining money in retirement, so dont feel overly attached to this option.
On other occasions, you may find that you simply dont have access to reverse mortgages. This will happen if you own either very little or all of the equity in your home.
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