How To Turn Disadvantages Of A Reverse Mortgage To Your Advantage

 

Reverse mortgage

A reverse mortgage is a financial product that allows homeowners, typically aged 62 or older, to convert a portion of their home equity into cash without selling their home. It is called a "reverse" mortgage because instead of making monthly payments to a lender, the lender makes payments to the homeowner.

Here's how a reverse mortgage generally works:

• Eligibility: To qualify for a reverse mortgage, you must be a homeowner who is at least 62 years old and have sufficient equity in your home.

• Loan Types: There are three main types of reverse mortgages available: Home Equity Conversion Mortgage (HECM), proprietary reverse mortgages, and single-purpose reverse mortgages. The HECM is the most common and is insured by the Federal Housing Administration (FHA).

• Loan Disbursement: With a reverse mortgage, you can receive the loan proceeds in various ways, such as a lump sum, monthly payments, a line of credit, or a combination of these options. The choice depends on the specific terms of the reverse mortgage.

• Repayment: Unlike a traditional mortgage, a reverse mortgage does not require monthly payments. The loan is repaid when the homeowner moves out of the home, sells the property, or passes away. At that point, the loan balance, along with any accumulated interest and fees, must be repaid. If the sale proceeds exceed the loan balance, the homeowner or their heirs receive the remaining equity.

• Responsibilities: As a reverse mortgage borrower, you are still responsible for property taxes, homeowners insurance, and maintaining the property. Failing to meet these obligations could result in defaulting on the loan.

• Loan Limits and Costs: The loan amount you can receive through a reverse mortgage is based on factors such as your age, the value of your home, current interest rates, and the type of reverse mortgage. There are upfront costs involved, including origination fees, closing costs, mortgage insurance premiums (for HECM loans), and interest charges over the life of the loan.

It's important to carefully consider the implications and costs associated with a reverse mortgage. While it can provide financial flexibility for seniors, it also reduces the equity in your home and may affect eligibility for certain government benefits. Consulting with a financial advisor or a HUD-approved reverse mortgage counselor is advisable to understand the details and potential consequences before deciding if a reverse mortgage is right for you.

How To Turn Disadvantages Of A Reverse Mortgage To Your Advantage

When it comes to a reverse mortgage, wise consumers weigh the advantages and disadvantages prior to signing on the dotted line.

Let’s start on a positive note, you could do what most borrowers do and opt for the reverse mortgage line of credit. Just think about how you would then be able to draw on the loan whenever money is required for daily living expenses, medical bills, prescription costs, home repairs, etc. This could really enhance your retirement years including in-home care expenses in later years.

Furthermore, your new found income does not affect regular Social Security payments or Medicare benefits. And lenders cannot foreclose on the loan for the life of the borrower.

Okay, that’s all well and good but how do you turn the major disadvantages of a reverse mortgage into a positive one? It’s all in the perspective. For every negative there is a positive to obtaining this loan.

It’s true a reverse mortgage loan may affect your eligibility for state and federal government assistance programs such as Medicaid but it also gives you an important financial cushion and does not (as mentioned above) affect your regular Social Security payments or Medicare benefits.

You also have no monthly payments to make. Granted, the amount you owe continues to grow larger over time but you also have more cash on hand to enhance the quality of your current lifestyle. Look at it this way, you will now have all the money you need (and want). After all, it’s your money. True, you won’t have the full selling price of your home to leave your loved ones but if they’re financially sound in their own right, do they really need a substantial inheritance?

Furthermore with the new found cash, you could re-invest into other income-generating streams such as stock and option trading. But that would be another story with its own pros and cons.

It all comes down to what’s important to you, what your current financial needs are and if leaving money to heirs is something you feel you need or want to do.