A reverse mortgage is a type of loan for senior citizens at least 62 of age, whereby the individual can convert their home’s equity into spendable cash income. In simpler terms, reverse mortgage allows the individual (homeowner) get the cash value of their home’s equity. It is unlike the forward mortgage used to purchase property. Here, the homeowner does not have to make monthly mortgage payments; instead, he or she gets to receive cash as income for giving up equity in their home.
How the homeowner receives money in a reverse mortgage
In reverse mortgage, the homeowner can receive the funds as fixed monthly payment, a lump sum, or as a line of credit.
Reverse mortgage is only available to senior citizens who have attained 62 years of age. That is because it is an effective strategy for retirement planning. Seniors can use the funds gotten to supplement their retirement income.
Reverse mortgage as a loan
Reverse mortgage is a loan because you are borrowing money against the value of your home. It’s unlike when you sell a home and get its market value.
With traditional mortgage, you have to pay interests upon the money borrowed, until you cover the whole cost.
But in reverse mortgage, you are actually borrowing money to pay back with your house when you pass away (you do not get to pay interests, instead you are the one to receive funds). Hence, federal regulations mandate that you borrow nothing beyond the value of your home. You pay back when you finally give up the property and move out, sell the home, or pass away.
So what are the benefits of reverse mortgage?
Benefits of reverse mortgage
· You remain the owner and resident in your home
With reverse mortgage, you do not have to move out of the home. This is one reason it is far much better than selling. When you sell, you have to seek another shelter and buy or pay rent. But with reverse mortgage, you get the precious opportunity to age in your own home until death without hassles.
· You get funds to aid life in retirement
Many senior citizens face the problem of diminished assets due to the ongoing monthly payment of their mortgage. This is a huge expense for most seniors. But with reverse mortgage, you no longer have to worry about paying; instead you receive funds to supplement your income.
· The income is tax-free
Income you receive from your reverse mortgage is tax-free because the IRS regards the money as loan proceeds. Nevertheless, the interest on reverse mortgage will not be deducted until you pay off the loan in full (by selling or when you pass away). Tax rules can get really complex so it’s always advisable to consult a financial expert before putting both feet into reverse mortgage.
· You don’t get to pay back beyond the property’s value
The balance of a reverse mortgage typically increases over time and can grow beyond the fair market value of your home. But not to worry; you are never expected to pay anything exceeding the property’s equity value because a reverse mortgage is a non-recourse financing. You and your survivors are therefore protected against any claims resulting from a loan balance exceeding your home’s value.
· Multiple options to pay back
You can pay back the reverse mortgage loan by selling the property or moving out and giving title to your lender. You can also pass away and leave everything. It will then fall on your heirs to repay the debt, and they too have multiple options to do so. They can sell and keep any equity above the loan balance. They can also decide to keep the property (if it means so much to them) and refinance the reverse mortgage. If, however, the debt is more than they wish to handle, the heirs may simply hand ownership over to the lender. The lender, as they prefer, may then contact the loan insurer for any remaining balance.
Just as reverse mortgage loan comes with many enticing benefits, there are also some downsides to it. It is always important to speak with a financial planner to assess your situation and determine if reverse mortgage is the best choice for you.
For expert assistance, call our office today. Our financial planners and attorneys are ready to give you all the help you need.
