Mapping your path to a comfortable retirement calls for personalization. At its best, financial planning for this life phase should resemble a shopping trip: you decide your priorities, set your budget, then make selections from an array of offerings based on your needs. As with hitting the stores, tastes and desires in planning for retirement are individualized, so certain approaches will appeal to some, but not others.
A reverse mortgage, for instance, can be a powerful financial planning tool for some families and individuals. If the television commercials and magazine ads promoting the product are your main source of information, however, you may be left with as many questions as answers.
In simple terms, owning your home can give you superb options for funding your retirement. You may well be able to cash in on your investment and help secure your standard of living without selling your home and moving elsewhere.
If you’ve been hungry for straightforward details about reverse mortgages, and curious as to whether you should consider one, here are three key facts that will get you up to speed:
The name says “mortgage,” which can lead to some confusion. A reverse mortgage is actually a type of home equity loan. The amount borrowers can receive from the loan partly depends on how much equity is in the home. With a reverse mortgage, you are borrowing your own home equity. However, unlike traditional home equity loans, no loan payments are due until the loan becomes due.
Because the lender has an interest in the property, borrowers are required to have homeowner’s insurance, pay property taxes and keep up with the home’s regular maintenance.
Reverse mortgages aren’t right for or even available to everyone. The first requirement is age; the borrower must be at least 62 years old, according to the Consumer Financial Protection Bureau. Recent changes to the program now allow for a younger non-borrowing spouse and protect the surviving non-borrowing spouse’s right to live in the home should the borrower pass away first.
Also, the home must be the borrower’s primary residence. That doesn’t mean the owner can’t own additional property. It does mean the home with the reverse mortgage must be where the borrower lives most of the time.
A reverse mortgage lets you enjoy the equity you’ve got in your home, which can make retirement a lot more comfortable. However, as with any loan, it must be paid back eventually.
With a reverse mortgage, repayment is due when the owner dies or moves away from the home.
Your heirs have rights to the equity in the home and can choose the best alternative for them — to keep the home or sell it.
- On the one hand, if the loan balance is less than the property value, they can take over the property by paying off the loan balance, using cash or a new mortgage to fund the pay-off.
- Or, they can sell the home and keep the equity remaining after paying off the loan.
- On the other hand, if the loan balance is equal to or more than the home value, then the bank absorbs the difference and your heirs have the choice of paying 95% of the appraised value or the balance owed to keep the home, whichever is less.
- Or, they can choose to sell the home or let it revert to the lender and owe nothing.
After years of building up equity in your home, it’s one of the most accessible sources or retirement income. And that can help you live the life you have hoped for during retirement.
NewRetirement can help you navigate the terrain of retirement planning in general, and reverse mortgages in particular. With our retirement calculator, you can see exactly what you have, and what you’ll need to retire comfortably. With a free one-on-one consultation, you can learn even more.
Fewer than half of Americans are adequately prepared for retirement, but you don’t have to be among them. If you take the first step, you could be on your way to a more secure future for the short and long term.
