If you own a TV, then you have seen the commercials about reverse mortgages. While you may have been intrigued, you might not know what a reverse mortgage is for and when is the best time to get one. This is further complicated by the fact that reverse mortgages do not function in the same way as traditional mortgages. With that in mind, let’s look at four situations when a reverse mortgage makes perfect sense.
First, what is a reverse mortgage? Unlike a traditional mortgage, a reverse mortgage is a way for seniors to either freeze their monthly mortgage payments or cash out the equity they have in their homes. In some cases, you can even use reverse mortgage to buy a home.
These mortgages have been around since the 1960’s but have become more common in recent years due to the number of baby boomers reaching retirement age. This brings up a key point. To get a reverse mortgage, a borrower must be 62 years old. In addition, should own their home and have a low mortgage balance.
The mortgage balance comes into play as a portion of the funds from a reverse mortgage must be used to pay off any existing loans on the home. However, there are no strings attached to the balance of the funds and borrower can decide to keep the equity in their home, get a lump sum payment, or set up an annuity or a line of credit with the proceeds.
If this sounds interesting, then you should check out a reverse mortgage calculator to see how much you could get. Now let’s get to the meat of this article – the situations when a reverse mortgage makes perfect sense.
#1. Dramatic Decrease in Income
You might be thinking to yourself that this happens to almost everyone who retires. But some retirements are direr than others. For seniors over 62 who planned on working longer, but have been faced with a career-ending health incident. Maybe it was a car accident or a heart attack. Either way, they cannot continue working as planned and given the circumstances they probably do not qualify for disability. In this instance, a reverse mortgage might be the only option left to augment the sudden drop in income.
#2. Seniors Living on Social Security Only
This situation is slightly different than the previous in that these seniors have worked their entire lives, in some cases until the age of 70, but they were unable to save enough for retirement and they don’t have a pension or 401K to rely on. If they are fortunate to own their own home, then a reverse mortgage might be an option to augment their meager savings.
#3. Retirees Who Don’t Want to Touch Their Nest Egg
Let’s face it, we are living longer than even before. At the same time, the cost of end of life healthcare is moving in only one direction – UP. These two trends indicate that nearly every retiree will run out of money near the end of their life. As such, some retirees are opting to cash in the equity they have built up in their homes, whilst keeping their nest eggs intact.
#4. Retirees Who Want to Buy a Home but Don’t Want a Monthly Payment
You’ve worked your entire life and retirement is a time to enjoy your hobbies and your family. Maybe you never owned your own home, but you would like to do so during your retirement. Well, reverse mortgages offer a way to have your cake and eat it too.
I know the old saying: if it sounds too good to be true, then it probably is. But in the case of reverse mortgages, it really is. The government has set up a program under the umbrella. The program is called HECM for Purchase, and it allows seniors to buy a home while freezing the mortgage payments. All a homeowner needs to do is pay the taxes and insurance on the home and when they sell the home they pay back the loan. It is a great option for retirees who would like to buy a new home.
photo credit: please also take a look at my favs 😉 Typical dutch house via photopin (license)