Advantages of Reverse Mortgage for Seniors Explained…
What is a reverse mortgage? It is a special benefit for people who are older than 62 years, whereby they can avail of a loan by which they can convert part of their home equity into cash.
There are many advantages of reverse mortgage for senior citizens and it is especially useful for seniors with limited income, as they can use their home for monthly expenses.
In a normal mortgage, the borrower makes payments to the lender, whereas in reverse mortgage, the borrower or house owner receives monthly payments from the lender.
What’s more, the house owner or borrower need not even repay the loan unless he sells the house or vacates it. However, he must continue paying all property taxes, insurance etc.
Let Us Check Out the Special Benefits of Reverse Mortgage for Senior Citizens
What is HECM?
HECM or Home Equity Conversion mortgage is the loan program by the Federal Housing Administration. It allows seniors to use their home equity in case they need the money.
However, this type of reverse mortgage includes an origination fee, where the seniors use their home for staying at home.
Drop/Rise in Value of Your Home
It is totally beneficial to the borrower.
- Even if the value of your home falls, your heirs will not owe more than the actual home value at the time of the reverse mortgage or sale.
- If the value of the home rises, your heirs or you could have additional equity when you actually sell the house or close the reverse mortgage.
Flexibility of Use
Most retired people use the reverse mortgage funds to close the gap between their retired income and their monthly expenditure. However, it is flexible and you can use it for any other purpose as well.
- You can choose to use the amount for paying for healthcare or for a particular medical treatment. Most old people require health care and Medicare or supplement insurance may not be sufficient to cover these costs.
- You can use the funds for funding a life insurance.
The real estate tax on your home sale gets reduced due to reduce in home value and the benefits go to your heirs upon the home sale in case you purchase life insurance with the amount.
Reverse Mortgage and Social Security
Some people might have concerns regarding this and whether their social security benefits will be affected if they take a reverse mortgage. A reverse mortgage does not affect your social security.
- You can still receive all your Social Security benefits. You would have paid for Social Security while working and can collect on it after retirement.
- Your pension benefits that you had with your employer will also not be affected. You have saved and worked hard for it and Reverse mortgage will not affect it in any way.
- Medicare will still be available for seniors even if they receive a Reverse mortgage loan.
Home Equity Line of Credit
- When you secure the amount in the form of a line of credit, you have to pay interest only on the amount you use and not the total amount you have received and saved in the bank as a line of credit.
- In addition, when you save the amount as a Line of credit in the bank, you have to pay interest to the lender only on the amount you use and not on the total amount received and put in the bank.
- In addition, the amount in the bank also receives interest.
- Some lenders also reduce the amount of interest on the loan if you get a line of credit.
No matter which institution you work with, ensure that you understand all the costs that are involved related to loan expenses, origination fees, the interest rates, the closing cost, service fees etc. It is a somewhat complex financial arrangement, so understand all aspects before signing on the dotted line. It is a serious financial commitment and could impact the heirs to your home, so do some research or find a counselor who can help you understand the cost and the obligations in the agreement before making a decision.
Increasing Overall Wealth
You can increase your financial stability with reverse mortgage!
- Many economists have concluded that you can use a reverse mortgage loan as part of your financial strategy.
Warning: Remember to get some quotes and shop around before you settle on a lender!
Reverse mortgage loans are exempted of tax.
- It is considered as a loan advance and is not an income that the person has earned. Hence, it is not taxable.
- It also does not affect benefits related to Medicare or Social Security.
Flexibility of Payment
Senior citizens can opt for receiving payment in several ways, which offers a lot of financial flexibility.
- Seniors can opt for a single lump sum payment against their home equity. This is a fixed rate of interest plan.
- All other plans have adjustable rates, where the rates will be adjusted on a monthly or yearly basis.
- With the adjustable rate, you will be able to access a guaranteed income per month or year for the rest of your life or for the period that you choose, say ten years.
- Alternatively, there is the flexibility of opting for a Line of Credit, where the money gets saved in your bank account and you can draw on the credit line and take how much ever you want, so long as the balance is within the principal limit.
If you own a home and are above 62 years, you qualify for such a reverse mortgage, provided there is about 20% of equity position in your home.
You do not have to bother about your FICO scores to be eligible and the lender will also pay off any existing mortgage on your home. However, check out the different types of reverse mortgages, as some are rather complicated and might not be suitable for you.
Review and compare different mortgage brokers or institutions before deciding on any particular company. Fees and costs differ from company to company, so you could save a lot of money by comparing the terms and conditions.
Reverse mortgage was typically meant for old homeowners who have low income but today it has evolved from people who have no other assets than their home to middle income groups who want to increase their total wealth and assets.