How to Use a Reverse Mortgage as a Retirement Tool
A reverse mortgage is a special type of home loan that allows borrowers who are at least 62 years old (and meet other eligibility requirements) to convert a portion of the equity in their homes into cash. This is an incredibly useful retirement tool. Refinancing your mortgage can save you hundreds of dollars a month and potentially thousands of dollars over a standard 30-year home loan.
Many retirees may assume that because they no longer have work income, they don’t have any options to get a new mortgage or refinance an existing one. On the contrary, there are ways that retirees can get access to mortgage loans which allow them take advantage of low interest rates by refinancing.
Reverse mortgages can be confusing but it is important to know the rules. Reverse mortgages allow lenders to offer monthly payments, a lump sum, or a line of credit to older homeowners. Under the FHA’s reverse mortgage program, lenders cannot collect on their loan for as long as the borrower remains living in the home.
“It’s not for everybody,” says Richard Mandell, chief executive of San Diego-based One Reverse Mortgage. “But for people looking for immediate cash-flow savings, it can be.”
According to Bankrate, a reverse mortgage can be a great retirement tool and it may have been seen as a last resort in the past but that is not the case anymore:
It doesn’t require monthly mortgage payments, but borrowers do have to pay their homeowners insurance, taxes and maintain their home.
The loan is repaid after the borrower dies or moves out. Borrowers can get the money from the reverse mortgage loan in one lump sum, as a line of credit, or get it paid out monthly.
Rewind a decade and reverse mortgage loans were considered an option of last resort. But these days, with people easily living more than 20 years in retirement, it’s becoming more of an income planning tool for some and a lifeline for others.
With a reverse mortgage, the lender makes payments to you based on a percentage of the value in your home. When the homeowner dies or moves out of the home, the homeowner or his heirs can sell the home to pay off the loan. They could also choose to refinance the existing loan to keep the home or they can sell the home to settle the loan balance.
Here is what retirees should know about reverse mortgages according to Investopedia:
- Older homeowners are offered larger loan amounts than younger homeowners. More expensive homes qualify for larger loans.
- A reverse mortgage must be the primary debt against the house. Other lenders must be repaid or agree to subordinate their loans to the primary mortgage holder.
- Financing fees can be included in the cost of the loan.
- The lender can request repayment in the event you fail to maintain the property, fail to keep the property insured, fail to pay your property taxes, declare bankruptcy, abandon the property, or commit fraud. The lender may also request repayment if the home is condemned or if you add a new owner to the property’s title, sublet all or part of the property, change the property’s zoning classification, or take out additional loans against the property