If a reverse mortgage is right for you, it can offer great financial relief.
A reverse mortgage is a loan. You are borrowing against your home equity. However, unlike traditional mortgages, with a reverse mortgage you do not have to pay back the money you have borrowed as long as you are living in the home.
Housing is usually both the most costly expense as well as the most valuable asset for most senior households. A reverse mortgage takes advantage of both of these facts. The loan enables you to eliminate ongoing mortgage payments. And – for borrowers with sufficient home equity – you can also get access to cash to use however you want or need.
However, the decision to secure the loan can be complicated and confusing.
How Do You Decide if a Reverse Mortgage is Right for You?
Almost all financial products have pros and cons. Reverse mortgages are no exception.
Some of the factors you will want to consider include:
Your need for supplemental income or improved cash flow from eliminating your mortgage payment.
Your desire for financial independence
Your ability to stay in your existing home for the long term
Your financial values and attitudes toward loans
Your interest in maximizing your estate for heirs
What Are the Main Reasons Other People Get a Reverse Mortgage?
New Retirement offers a Reverse Mortgage Suitability Calculator that assesses whether or not the loan is a good fit for you. So far over 9,000 people have used this new tool.
For these people, the strongest reasons to secure a reverse mortgage are:
The desire for financial independence
The wish to remain in their own home for the rest of their lives
Needing income is another big reason people seek a reverse mortgage.
Reverse Mortgage Disadvantages
While there may be strong reasons to get a reverse mortgage and much has been done in the last year to make reverse mortgages a stronger product — protections for spouses (no matter their age) have been put in place and fees and interest rates have become more favorable — there are some downsides.
Here are some possible disadvantages to the product that you should consider when assessing your suitability:
You Accumulate Interest: 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. The loan and accumulated interest become due when you or your spouse die or move out of the home.
Disappointing Loan Amounts: Some reverse mortgage borrowers are disappointed by the amount of money they can borrow with a reverse mortgage. Your actual loan amount is determined by a calculation using the appraised value of your home, the amount of money you owe on the home, your age and current interest rates. The HECM loan limit is currently set at $625,000 but very few borrowers actually get that much.
The Loans Are Complicated: The basics of reverse mortgages can seem so foreign to people.
On the other hand, the advantages of the loans are clear. Reverse mortgages enable you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home. Given the right set of circumstances, a reverse mortgage can be an ideal way to increase your spending power and financial security in retirement.
Furthermore, the loans are flexible, have a low risk of default and are tax free.
New Reverse Mortgage Calculator Assesses Your Suitability – Is a Reverse Mortgage Right for You?