Is a reverse mortgage right for you?
A reverse mortgage is a type of home equity loan, also known as a home equity conversion mortgage (HECM) where the home owner continues to live at the property while receiving a second stream of income by withdrawing equity from the home. While controversial, it can be a good option for seniors who want to continue living in their own home while boosting their retirement income.
So what are the benefits of a reverse mortgage, and why does it continue to be controversial?
You retain ownership of your home
Maintaining ownership of the home is a huge drawcard for people interested in a reverse mortgage. If you wish to continue living in your own home beyond retirement, a reverse mortgage makes this financially realistic, so long as you comply with the terms of the loan, and cover all the other expenses such as home insurance.
If you wish to sell the home, you will repay the remainder of the loan with the proceeds of the house. Once the loan is repaid, any remaining equity belongs to you or your heirs.
Additional retirement income
Today, retirement lasts longer, and many people simply do not have the savings to supplement their income enough to maintain their lifestyle in retirement. However, if they do have equity in their property, the income from a reverse mortgage can help reduce debt and expand lifestyle opportunities. You can choose to take these funds as a lump sum, a line of credit you can access when needed, a series of monthly payment, or a combination of all three. As a result, this also protects other streams of retirement income, so that retirement savings last longer. Loan proceeds are generally not considered taxable income although you will need to check with a tax professional to confirm that this is the case in your area. Additionally, you no longer make mortgage payments, creating a significant saving in itself.
The changing value of your home
One of the big issues relating to a reverse mortgage is how the cost of the loan relates to the value of your property, as both figures will change over time. You do not want to leave your heirs with a debt that is more than the value of the property. It is important to research how the loan will compare to the value of the home over time, calculating for fees and interest, as well as any potential drop in the property’s market value.
In some areas, the government will insure the reverse mortgage loan for the value of the property at the time you take out the loan. This means that if you sell the home for less than the value of the loan, your insurance will cover the remaining amount, so you will not find yourself in debt. However, if your home increases in value, you may have the option of refinancing the reverse mortgage to increase your own income stream.
A reverse mortgage loan must be repaid in full when a maturity event occurs, such as the death of the last surviving borrower or if the property is no longer the homeowner’s principal residence. This condition of a maturity event is an important element to consider before deciding upon a reverse mortgage, to ensure it does not negatively impact other members of the family. The loan may also become due if the home owner fails to meet other financial obligation such as taxes, or fails to maintain the property.
Considering your heirs
If your dream is to leave a nest egg for your children, you need to consider whether a reverse mortgage will compromise their inheritance. Depending on how the reverse mortgage is structured, your heirs could discover that there is no inheritance at all, once the family home reverts to the lender upon your death. However, if the loan is effectively managed, there should be enough to leave something to your heirs after paying off the loan.
Look at all the fees and interest related to the loan and calculate how this will impact the equity of the property as you continue receiving payments. The inheritance you leave will also be affected by how you use your reverse mortgage payments.
Choosing a reverse mortgage
The main consideration when choosing a reverse mortgage is to calculate whether it is the right financial decision in the long-term. Talk to your financial advisor or mortgage broker to understand all the ramifications of the reverse mortgage loan so you can make the right decision for your family and your financial future.