You’ve heard the commercials on the TV and maybe even your friends have spoken about getting a reverse mortgage. Now, you’re wondering if you should, too.
Over the years, reverse mortgages have gotten a bad rap as a last-ditch option for seniors short on cash. However, reverse mortgages may provide many helpful benefits, including the ability to replenish or boost your retirement account or keep a foreclosure at bay.
Learn with these suggestions from Wisebread.com about what a reverse mortgage is and the how one might help your own financial situation.
What Exactly Is a Reverse Mortgage?
A reverse mortgage, sometimes referred to as a home equity conversion mortgage (HECM), is a specialized loan available to individuals who are over 62 years old. This loan lets borrowers convert a portion of home equity into cash. Interest on the loan is deferred until the home is sold or the last borrower dies.
To qualify for a reverse mortgage, homeowners must own their home outright or have a low mortgage balance that can be paid off easily with the proceeds of the loan. Homeowners must also live in the home to remain qualified. Homeowners will still be required to pay for property taxes and insurance premiums.
Ways to Use a Reverse Mortgage
If you have a good portion of home equity but are struggling to pay the monthly payments, a reverse mortgage may pay you the equity, which can in turn be used to pay off your mortgage. You will need to have a reverse mortgage with a lump-sum disbursement and show that you can afford taxes and insurance costs.
Another way to take advantage of a reverse mortgage is to give your retirement fund a well needed boost. If you didn’t save enough for retirement, you aren’t alone — most Americans don’t. Receiving some of your reverse mortgage as a lump-sum lets you invest the money if market conditions are favorable.
Other Ways to Utilize a Reverse Mortgage?
Technically, the money you receive from a reverse mortgage is surely your money, and you can use it as you see fit. You don’t need good credit or a lot of income to qualify for an HECM. Some say investing your HECM into your retirement is one of the best things you can do with the money. Here are a few other financial suggestions you can make with the money you earn from a reverse mortgage.
Purchase Investment Property
Possibly purchase property in cash from your HECM and not have to worry about being approved for a mortgage. However, buying property is not always a good investment; be sure the property you buy is worth it. In other words, don’t throw money into any property purchase and dream of live off its rental income.
Purchase a Second Home
If you enjoy splitting your time at a vacation home, then an HECM with enough equity could help you afford to buy a second home without having to worry about mortgage payments. But, don’t just buy a second home because you can. A second home purchase should be considered if it can save you money and earn you money. A second home may help you avoid vacation or hotel rental fees, and you can rent out your home when you are not there. Remember, you must keep your current home, the home you wish to get an HECM loan with, as your primary residence.
Pay Off Your Debts
If debt is weighing you down monthly, why not consider using your HECM to pay off debts and save money on interest payments? However, don’t be tempted to get back into debt. Using your HECM to pay off debt should be the start of a debt-free way of living, not a bandage to place on a shopping debt or other debt.
Some Other Downsides of a Reverse Mortgage
If you’re presently using government programs, like Medicaid or SSI, having your HECM disbursed as monthly payments will be counted as income. You will face foreclosure if you cannot afford the property taxes or insurance premiums. Additionally, before proceeding with a reverse mortgage know that the upfront fees can be high. Also, the amount of money you get upfront from your mortgage is dependent on various factors, including your age and the value of your home. You might not get as much money as you need.
Before dipping into your equity, consider if this is truly the best option for your own personal financial situation. If you have that much equity in your house, you could even sell it and perhaps downsize to a smaller home that’s mortgage-free.
