Is a Reverse Mortgage Right For You?
WHY DO PEOPLE GET REVERSE MORTGAGES?
Retirement is amazing. They don’t call it them your “Golden Years” for nothing. You get to choose what you want to do and when you want to do it. You want to go surfing right now; you can do it. You want to party with friends all day, go for it. You want to do absolutely nothing for a week, well why not?
Pictured: How to enjoy retirement
Although retirement is amazing, retiring, on the other hand, is difficult. Most people spend 40-odd years working hard and saving up for the chance of enjoying their retirement. Unfortunately, not everyone makes it, and even the best retirement income plans are at risk. In this article, we’ll look into how to help mitigate that risk and shore up your savings with a reverse mortgage.
Thankfully, there are many options for retirees looking to supplement their savings. Reverse mortgages are an excellent way for retirees to turn their home into a source of revenue.
What Is A Reverse Mortgage?
A reverse mortgage allows you to create an income stream by loaning off the value of your home, assuming you own the home free and clear. Reverse mortgages can be confusing since it’s a bit of a misnomer. Typically, we would associate the word mortgage with liability. However, a reverse mortgage is what it sounds like.
A traditional mortgage is where a bank lends money to a person purchasing the home. However, the bank holds the title on the house as long as the mortgage balance remains outstanding. The home buyer stays in the home usually paying off the mortgage over 30 years.
A reverse mortgage is similar, with the main differences being the absence of restrictions over how you use the money, and that the creditor gains a lien over the home, rather than gaining ownership. A lien allows a bank or creditor to lend you money secured by the home. Let’s go over an example.
Let’s say that you’re a 72-year old man living in Kitty Hawk, NC. You have a home that’s worth $300,000, and you want to know how much you could receive if you put your home up for a reverse mortgage. If we use a simple reverse mortgage calculator like the one featured a www.reversemortgage.com, you would receive roughly $472 a month for the rest of your life.
What’s the Catch?
Less Money For Your Heirs
When you enter a reverse mortgage, you’re taking a loan out on your home. You will be able to remain in your home to your dying day. However, once you permanently move out (or pass away), your heirs will need to either pay back the debt or sell the home. As a result, your home may not be passed down through the family.
Interest On The Loan
The second factor to consider with a reverse mortgage is that you’ll be charged interest, just like an ordinary mortgage. However, with a reverse mortgage, any interest is accrued but not paid until the end of the loan. The interest doesn’t accrue in the same way as it does with a normal mortgage, but there will be interest owed after you pass away. As a result, your heirs will receive less money from the home when they sell it since they’ll need pay back the loan plus interest.
That’s why a reverse mortgage is an option most suited to retirees who both:
- Plan to live in the same home for a long time.
- Are okay with leaving less for their descendants.
What’s Involved In Calculating A Reverse Mortgage?
So, how did we arrive at the figure of $472 a month? The amount you receive from a reverse mortgage depends on three factors:
- The price of your home
- Your age
- Your zip code
The older you are, the higher the value of your home, and the more popular homes are in your neighborhood, the larger amount you’ll be able to borrow from a reverse mortgage.
It’s also important to note that there are several options for how you can receive your income from a reverse mortgage. For instance, you can choose to receive a lump sum, or you can elect to receive lifelong monthly payments. I recommend you consider your options carefully and choose what best suits your current financial situation.