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Did you know? Reverse Mortgages can be a great financial resource for aging adults, ages 62 and over, and have enabled many seniors to use their home equity to sustain long-term retirement while maintaining residence in their home. Additionally, the homeowner maintains ownership of their home and are allowed to defer payment of the loan until they die, sell, or move out. Like a standard mortgage, a reverse mortgage uses your home as collateral, and can provide a powerful way to tap into the value of your home. It does have some key differences from a traditional mortgage as it allows homeowners to convert their home equity into cash with no monthly mortgage payments. The money from a reverse mortgage can be distributed in several different ways - lump sum, regular payments, or line of credit. Let's look at 3 ways a reverse mortgage can benefit you...
1 - Reduce Retirement Expenses & Cash Outflow Eliminating a monthly mortgage payment has historically been the primary motivation of reverse mortgage borrowers. Getting out from the financial burden of a monthly mortgage payment typically allows them to live more comfortably off their retirement income. Eliminating this payment, before full retirement, can also allow a reverse mortgage borrower to fund other financial investments to increase your retirement savings or create an emergency cash reserve that is accessible with no market or tax consequences. Be sure to consult a tax professional.
2 - Defer Social Security Benefits
Many seniors have discovered the advantages of getting a reverse mortgage to use as an income stream allowing them to defer using their Social Security benefits. This is especially applicable to those in good health and who have concerns about longevity and outliving their money. The advantage in using this strategy is that by claiming Social Security at a later age as opposed to collecting early, beneficiaries receive a larger monthly payment (see chart).
3 - Protect Against Market Volatility on Investments Market volatility or fluctuations affecting investment returns is one of the biggest risks retirees face when withdrawing money from a retirement portfolio. When using investments to support retirement a retiree runs the risk of having to sell in a down cycle. By tapping into a reverse mortgage, you have more control over the timing of withdrawals and can avoid selling investments in a down cycle.
FAQs: How Is a Reverse Mortgage Paid Back? Unlike a traditional mortgage, a reverse mortgage does not have a set maturity date or date the loan must be repaid in full. Most Reverse Mortgages define the maturity date as:
The borrower passes away.
The borrower sells the property.
The borrower moves out of the home.
The borrower fails to provide reasonable upkeep or pay property taxes.
The lender has first right to the proceeds to recoup any outstanding balance on the reverse mortgage (unless there is also a lien on the home for unpaid property taxes). If the outstanding loan amount is less than the sale price, heirs will receive the difference. (National Association of Realtors, Greg Gilman, 2017)
FAQs: How is the Family/Estate Protected at Loan Maturity? There are a number of options.
The Estate/Immediate family can purchase the home at 95% of the current market value regardless of what is owed.
Limitations of Liability/Non-Recourse Loan: Borrower(s) shall have no personal liability for payment of the debt.
Lender shall enforce the debt only through the sale of the property. No Pre-Payment Penalties: Borrower(s) may make payments, sell, or pay-off at any time with no fee.
The above are just a few ways a reverse mortgage might benefit you. I can help you analyze your situation and advise what the best option would be for you.
