A reverse mortgage, also known as a home equity conversion mortgage (HECM), allows homeowners age 62 or older to convert some of the equity in their homes into cash without having to sell their homes or take out a loan. In fact, the only time you might have to move out of your home is if you no longer live there and your home becomes uninhabitable—you’re not required to ever move again even if your financial situation changes drastically.
Find Out If a Reverse Mortgage Could Be Right for You
What is a reverse mortgage?
A reverse mortgage is a special kind of home loan designed to help homeowners tap into their home equity in retirement. The loans are repaid when your house is sold, or you move out or die. This type of loan is usually taken out by seniors age 62 and older who own their homes outright and have no mortgages. A reverse mortgage can help you pay off student loans or other expenses, offer tax breaks on your income (such as avoiding capital gains taxes), and allow you to remain in your home throughout retirement without making any payments on an existing mortgage.
How do they work?
Though it’s called a reverse mortgage, it has nothing to do with home repair. Rather, it allows people who are 62 years or older and own their home outright (or have minimal mortgage debt) to convert part of their home equity into cash or receive lump-sum payments. It does so by allowing seniors to take out an amount of money that is based on the appraised value of their home. These types of loans are structured to last as long as you live in your house and pay taxes on it. The end result is that you remain in your home until you pass away; at that point, any debt accrued during your life comes due.
How much can I get?
This is really an important question when considering whether or not you should pursue a reverse mortgage. The amount you get at closing will depend on how much your home is worth, your age, and how long you live in it.
The age requirement is 62 or older, and homeowners must live in their home. Your home must be your primary residence, and it cannot be worth more than $1 million (if you are married filing jointly, no more than $800,000). As of April 2015, FHA loan restrictions apply to reverse mortgages. This means that all properties will require a current credit report, property inspection and an appraisal completed within 90 days of closing. The estimated cost of closing on a reverse mortgage loan includes: application fee (mandatory), processing fee (mandatory), insurance premiums (optional), closing costs and title policy fees. It’s important to compare your options so you can know exactly what you’re paying for.
Why should you get one?
The lack of equity in your home may be preventing you from accessing cash that would help you live more comfortably and independently. But with a reverse mortgage, you can get some cash while still owning your home. In fact, if you’re 62 or older, there’s no need to sell or move out at all. Reverse mortgages are designed to help seniors access funds without impacting their quality of life—and there are no monthly payments or income requirements.
What are the risks?
As with any financial transaction, there are risks associated with reverse mortgages. In order to receive payments under an FHA-insured reverse mortgage, you must pay property taxes and insurance on your home. Property taxes and insurance can add up over time; in fact, they are more expensive than they were when you took out your loan. Additionally, if you live in a community where property values have fallen significantly or continue to fall over time, you could be underwater on your home’s value. This means that even if you continued to make payments under an FHA-insured reverse mortgage (or if your heirs do after you pass away), there would still be some amount of money owed that would never be recouped because of these unpaid bills and outstanding liens from lenders.
Should you hire an advisor?
There’s no denying that information technology is changing how we live and work. Thanks to cheaper and faster communication, more efficient processes and more sophisticated products, companies are able to offer new products and services that in turn help people make better decisions about where they want to live, when they want to retire, etc. But there is still value in having an unbiased third party look at your finances and your goals with fresh eyes. Technology can only do so much; it has limits. And when it comes time to choose among these new options—some of which have never been offered before—having someone you trust who can cut through all of it may be what matters most.
A final word about getting good advice.
After all is said and done, even if you’ve followed each of these steps—from getting educated to setting goals to putting your plan into action—getting good advice can be just as critical as your other efforts. Whether it’s about retirement planning or whether you should lease or buy a new car, getting an outside perspective can help ensure that you don’t overlook key information and make informed decisions in an area that may have serious implications down the road.
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