What Are You Giving Away When You Get a Reverse Mortgage?
When you get a reverse mortgage, can you have your cake and eat it too?
Are there trade offs?
The trick to being happy with a reverse mortgage is to be comfortable with the trade offs you are making. Isn’t that true of almost every decision we make? Every decision — especially financial decisions involve prioritization and trade offs.
- When you eat chocolate cake for breakfast, you are trading deliciousness for the potential sugar crash a bit later.
- When you buy a stock instead of a bond, you are opting for a higher risk of losing money for a higher chance of making more money.
- When you retire, you are choosing to have more control over time and giving up making money
When you get a reverse mortgage, you are making trades and compromises as well.
So, What Do You Get When You Secure a Reverse Mortgage?
You secure two main things when you get a reverse mortgage: an easing of your financial purse strings and the comfort of knowing that you can stay in your home as long as your health allows.
Research backs this claim. Of the nearly 1 million people who have used the NewRetirement reverse mortgage suitability calculator, the two strongest reasons to secure a reverse mortgage are:
1. When You Get a Reverse Mortgage, You Can Stay in Your Home
You can live in your home for as long as you want when you secure a reverse mortgage. A reverse mortgage gives you a guaranteed place to live.
With a reverse mortgage, you retain home ownership and the ability to live in your home. (As such you are still required to keep up insurance, property taxes and maintenance for your home.)
2. When You Get a Reverse Mortgage, You Gain Financial Independence
Depending on your circumstances, a reverse mortgage can give you financial independence in a number of ways.
Many reverse mortgage borrowers opt for a combination of all of the following financial benefits. You can:
- Pay Off Your Existing Mortgage: If you have an existing mortgage when you secure a reverse mortgage, then your reverse mortgage loan amount will be used to pay off your existing mortgage. This means no more monthly mortgage payments. Just imagine what you could do with that money EVERY month.
Get Cash: The HECM Fixed Rate reverse mortgage enables eligible home owners to take out some cash, in a lump sum, from their home equity.
This cash can be used for ANY purpose. Although you make no monthly mortgage payments, interest charges accrue on the total loan amount every month you carry the reverse mortgage. Therefore, the total size of your loan will increase over time, though the total amount owed can never exceed the value of your home.
Be Paid Monthly Income: Opting to receive monthly income from a reverse mortgage is similar to purchasing an annuity.
You can usually opt for “Tenure” or lifetime option for the monthly income. However, some lenders can also offer “term” options. A term option means that you will receive monthly income for a predetermined amount of time. With the term option you would likely receive a higher sum of money each month than you would receive with a lifetime or tenure option. To determine what income you could receive with a term option, contact a lender.
Gain Access to a Home Equity Line of Credit: A credit line is money that you have available for use on anything at anytime. A credit line differs from cash in that you only accrue interest charges on the money that you use, not on the amount available to you.
A credit line is the most popular and in most cases the most cost efficient option for receiving a reverse mortgage loan because you choose how much money to take and when you want it. Interest is only paid on the costs of the loan and the amount you’ve taken out while the balance available continues to grow. Learn more about the reverse mortgage line of credit option.
And So, What Are You Giving Away When You Get a Reverse Mortgage?
The peace of mind reverse mortgage borrowers get from knowing that they can stay in their homes and ease their financial squeeze are immense, but there is a trade off for this financial freedom.
Here are the two key things you are giving away when you get a reverse mortgage:
Inheritance: With a reverse mortgage, repayment is due when the owner dies or moves away from the home.
In most cases, when you have a reverse mortgage, your estate will be worth less. However, your heirs have rights to any remaining equity in the home and can choose the best alternative for them — to keep the home or sell it.
- 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.
- They can sell the home and keep the equity remaining after paying off the loan.
- If the reverse mortgage 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.
Paying Down Debt: When you get a reverse mortgage the amount you owe will grow. So instead of being debt free or paying down your debt, you will be accumulating debt.
However, reverse mortgage debt is unlike almost any other debt available anywhere.
There are no monthly payments on a reverse mortgage. As such, the loan amount – the amount you will eventually have to pay back – grows larger over time. Every month, the amount of interest you will eventually owe increases – it accumulates. However, the amount you owe on the loan will never exceed the value of the home when the loan becomes due.
Most reverse mortgage borrowers appreciate that you don’t have to make monthly payments and that all interest and fees are financed into the loan. These features can be seen as Reverse Mortgage disadvantages, but they are also huge advantages for those who want to stay in their home and improve their immediate finances.
Best of all, a reverse mortgage is a non recourse loan. This means that the lenders have no recourse except for the home itself. So, you — or your heirs — are only responsible for paying back an amount no more than 95% of the home’s appraised value—even if what you owe exceeds the value of the home.
Is a Reverse Mortgage Right for You?
If you want to stay in your home and want to eliminate existing mortgage payments or use your home equity for retirement, a reverse mortgage might be right for you. Calculate your reverse mortgage loan amount today.