As with any investment strategy, there are Reverse Mortgages Pros Cons to consider. Let’s take a look at whether this can benefit you. Reverse mortgages can change a senior citizen’s retirement from an anxious, month-to-month scramble to meet obligations without draining savings to a comfortable time that allows enjoyment after a lifetime of hard work. The reverse mortgage allows seniors to access the funds inside their largest single investment — their house. A reverse mortgage allows him to remain the owner of his own home while borrowing against the equity. He doesn’t even have to make any payment until he moves out, sells the house or passes away. While this does mean that the home’s equity shrinks over time, it also means that the retiree gets to enjoy the money that he has earned, and if his heirs want to keep the home, then they can pay off the loan at his passing, or they can sell the home and use the proceeds to dispose of the rest of the mortgage.
Benefit #1: Access to Liquidity
If you have paid off your home, you’ve made 300 payments (in a 25-year loan) or perhaps even 360 (in a 30-year loan). Each one of those payments was well into the three figures, if not four figures. A lot of that went to pay for interest on your note — money you’ll never see again. The principal you paid in, though, as well as any appreciation in the home’s value over time, is your equity. If you’re finding retirement is a little more expensive than you had thought, then this money can come in handy — except it’s all tied up in your house.
However, you can’t turn a staircase or chimney into a car payment or a co-payment for an important procedure. However, you can take out a loan against the equity of your house. This gives you the money you need without having to give up any of the tangible benefits of your home.
Benefit #2: Stability in Your Home
No matter how long you live in your home, you get to stay there without having to make any payments back on your reverse mortgage. You can, of course, make payments if you develop income from other areas, such as a bequest or lump sum payment from a pension, but you do not have to. The note does not begin to come due until one of three things happens: you pass away, you sell the house, or you permanently move out of the house. In almost 100% of cases, the equity remaining in the house at sale more than covers the balance of the loan, leaving equity in place. Amansad Financial Services has access to Reverse Mortgage Companies that will guarantee that your home stays in an equitable position.
Drawback #1: Obtaining Replacement or Secondary Financing
Because Reverse Mortgages have an increasing balance, traditional lenders will not provide second mortgages if more funds are needed. In addition, if your income in retirement is substantially less, it may prove to be difficult to refinance back with a traditional lender. A Private Lender may be a short option however the lender will approach with some more caution.
Drawback #2: Risks of Permanent Care
If you have to move out of your home into a full-time care facility, and you end up spending more than a year in that facility, the loan becomes due. The costs of a full-time care facility can be high, and if you are relying on funds from your reverse mortgage to pay for your expenses there, you end up having to pay the mortgage back if it turns out that you move into a care home.
If you end up staying in your home until you pass away or are in a position to sell it, a reverse mortgage can provide a lot of liquidity that many senior citizens do not have. Reverse mortgages help many seniors live a more comfortable lifestyle during retirement. If you are prepared for the contingency of full-time care and have an exit plan in place for your home, then the cash can make a positive difference for you and your family.
If you and your spouse are 55 years of age or older, and you have sufficient equity in your house, then it is likely that you will qualify for a reverse mortgage. For people who have built up a considerable amount of equity but are worried about liquidity during their retirement, taking out a loan against their house can make the short term more comfortable. Many people have misconceptions about reverse mortgages and do not always understand how they work. Some of the most common questions that people call Amansad Financial with about reverse mortgages appear below.
Do you want to learn more about reverse mortgages? Give a lending representative at Amansad Financial a call today to discuss your personal situation and receive a free recommendation for your financing needs.
Myths about Reverse Mortgages
Here you can see some of the myths that many associate with reverse mortgages paired with the actual facts:
Myth: The bank can make the owner sell the house or threaten to foreclose at any point in time.
Fact: Reverse mortgages are lifetime products. As long as the homeowner keeps the property in good condition and maintains insurance and property taxes in good standing, and as long as he lives in the property, the bank will not call the loan, even if property values plummet and the house loses value. The benefit of this type of mortgage is that the borrower remains in the house as long as he wants.
Myth: The bank owns the home when the reverse mortgage begins.
Fact: The homeowner keeps the title to the home and is free to decide if he wants to move out or sell the property. At that point, the balance and interest become due, but the choice is up to the homeowner.
Myth: A reverse mortgage can leave you owing more on the house than what it is worth.
Fact: Most lenders adopt a fairly conservative approach to reverse mortgage lending, in many cases restricting the mortgage amount to 55 or 60 percent of the appraised value of the home. The purpose of this is to protect against fluctuations in property value. This approach maximizes the number of clients who still have equity in the house after repaying the loan.
Myth: The interest rates for reverse mortgages are really high.
Fact: It’s true that rates for reverse mortgages are higher than the rates for conventional ones – because you’re not having to make payments each month. However, they are not much higher, maybe 1 or 2 percent higher than the prime mortgage rate.
Myth: If you have an existing mortgage, you can’t get a reverse mortgage.
Fact: Quite a few clients use the reverse mortgage to pay off such debts as their original mortgage as well as consumer debt, giving them more cash flow each month.
Myth: When one partner passes away, the surviving spouse ends up getting stuck with the loan.
Fact: As long as the surviving spouse wants to remain in the house, she won’t have to make a single payment – unless she decides to sell the house. Then, the loan comes due.
Fact: Reverse mortgage applications do not rely on credit score or verification of income. The determination is made on the amount of secured debt you already have out against the home, your age, your home’s location and type, and the appraised value of your property.
Myth: A home equity line of credit (HELOC) is a preferable option to a reverse mortgage.
Fact: It’s true that a HELOC is a quality borrowing option over the short term, if you can pay the balance and interest in the near future. However, banks can call HELOCs in, and you have a high risk of cancellation or non-renewal. A reverse mortgage can’t be called in because of a change in interest rates, a drop in property values or a change in your income. When you take out a reverse mortgage you can prolong the savings for your retirement.
Further reverse mortgage info:
Do you have more questions in regards to Reverse Mortgage? Give a call to a Certified Reverse Mortgage professional at Amansad Financial today.