Reverse Mortgages: Why to Use One and When it Makes Sense
Reverse mortgages are helpful financial tools when it comes to investing in your future. They can offer financial peace of mind and provide a better retirement.
Best of all, you’re able to remain in your home — as the homeowner — while you collect payouts from your mortgage. As long as you keep up with property taxes, homeowner’s insurance, and maintenance costs, you have nothing to lose and so very much to gain.
How does a reverse mortgage work?
Like you may expect, a reverse mortgage is the opposite of a traditional mortgage. Instead of making monthly payments to your bank or lender, they pay you. The money you receive comes from your home equity, which is the difference between what you owe and your home’s net worth.
You are simply borrowing against your home when taking out a reverse mortgage.
Why choose reverse mortgage funding?
A lot of homeowners balk at the idea of borrowing against their homes. Why would you take away from your equity, something you’ve worked hard at building through years of mortgage payments.
Here are four reasons a reverse mortgage can help you.
1. Eliminate mortgage payment → add to your monthly budget
The biggest reason American Financing borrowers choose a reverse mortgage is to pay off their existing mortgage before retirement. Think of it this way -- a mortgage payment is likely the largest monthly bill in your budget. Depending on your loan amount, interest rate, and program type, it could be anywhere from $1,100 to $2,000 a month (maybe less, maybe more). Should you choose to pay off your loan via a reverse mortgage. And with prescription drug costs soaring and the cost of living increasing, every extra dollar can help.
2. Access home equity → receive funds in a lump sum
Most often, borrowers will take out a portion of available funds as a way to preserve their home equity. They’ll choose to receive a portion of funds in one lump sum. This option proves most beneficial when it comes to making home repairs or renovations. Maybe it’s adding a ramp, a walk-in shower, even replacing a roof.
No matter the reason -- it’s an easy way to access a significant amount of cash without having to make high-interest monthly payments (as you would on a personal loan or credit card).
3. Receive fixed monthly payments → let your home pay you
Enjoy another option for monthly income. According to The Federal Reserve and USA Today, “the typical retirement-age American spends $50,000 a year.” When you consider the years lived during retirement, plus the growing cost of expenses (including unforeseen expenses), you should expect to have over one million dollars set aside to live comfortably.
Of course, the amount you’ll truly need depends on a lot on the kind of life you want to live. But again, you have to keep in mind that there are many costs that may surprise you (medical, prescription, transportation, etc.). Are you confident your budget will last? If not, using a reverse mortgage to receive fixed monthly payments is a great option to supplement your income.
4. Open a line of credit → let funds grow until you need them
Consider this option your emergency backup. It’s an easy way to preserve investment accounts during market downturns or to build a safety net for unplanned emergencies. The line of credit is set up in advance -- before funds are needed -- so it’s ready to help you in time of need.
It makes sense to choose a reverse mortgage if…
You need extra money, but do not qualify for state or local assistance programs
You have enough income to cover property taxes, homeowners insurance, and home maintenance expenses
You do not want to sell your home
You want to delay Social Security benefits
You’re fine with selling your home when it’s time to pay the loan (as opposed to leaving it to heirs)
How much money do you get from a reverse mortgage?
The amount of money you can receive from a reverse mortgage depends on a few factors. They include your age, home value, current interest rates, whether or not you have an existing mortgage on the property, and how you plan to receive the funds (monthly, lump sum, etc.).
While lenders follow no set loan-to-value when writing a reverse mortgage, there are loan limits.
Currently, the maximum amount you can borrow is $970,800 — even if your home is appraised at a higher value, you can only access the $970,800. Assuming you have saved for retirement in other ways, that is a comfortable amount that can be very helpful.
Remember, those funds can be used however you’d like, including helping you:
Pay for long-term care insurance
Pay for grandchild’s college
Bridge the gap until Medicare kicks in
Pay for short-term caregiving
Eliminate credit card debt
Cover the costs of transportation
Pay your Medicare Part B and Part D costs
Have money available for estate plans and wills
Delay collecting Social Security benefit until it maxes out at age 70
And much, much more
How do you pay back a reverse mortgage?
Most reverse mortgage beneficiaries and family members repay a reverse mortgage by selling the home. The proceeds cover the loan balance, and any leftover funds will be distributed to the family.
If you are not interested in selling the home, you can refinance the loan to remove the reverse mortgage. The balance must be paid in full. If you do not pay back the funds, the home will go into foreclosure.
Is a reverse mortgage right for me?
A reverse mortgage is a strategic way to access cash in retirement; however, it may not make sense for everyone. Your best approach is to speak with your financial advisor and a licensed reverse mortgage expert.