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The expectation of most people is that their expenses will reduce after retirement. But this is often not the case for many people due to a number of reasons. Uncovered medical expenses, travel costs, and unexpected taxes are some of the reasons people spend more in retirement. There is also the fact that retired people have more free time which could translate to more shopping time and consequently increased expenses.
There are several ways to borrow when retired and a reverse mortgage is one of the most explored options, especially for people that have paid off their home or only have a small mortgage. The concept of a reverse mortgage is simple. You borrow part of your home’s equity as tax-free income. And, doing this can serve as an extra source of income for you.
If you are considering a reverse mortgage in your retirement years, then there are key things you should know about reverse mortgages. Knowing these things allows you to evaluate whether a reverse mortgage is right for you or not. Here they are:
Understand what it entails
One of the first things you should know about reverse mortgages is the requirement. To qualify for a reverse mortgage, you must be a homeowner and be at least 62 years old. Also, you must live in the home you’ll be borrowing against as your primary residence.
Reverse mortgages are truly reverses of traditional mortgages as the lender makes payments to you. This is in contrast to traditional mortgages where you make payments to the lender.
The exact amount paid to you depends on the value of your home. Get a local real estate agent to inspect the home and give you the most probable selling price of your home. This is to ensure your reverse mortgage company valuates your home fairly. You are also required to maintain your home and keep up with payments like property taxes and homeowners’ insurance.
Evaluate payment options
You can receive your reverse mortgage payment as a lump sum, a monthly payment, or a line of credit. Some companies may even offer you a combination of these options. You’ll want to make sure that any company you are using will offer you your preferred payment option.
Your personal situation and the purpose of the money you receive will determine the type of payment option you choose. If you are looking to have an additional source of income to supplement your monthly income, a line of credit or monthly payment will be suitable for you. But if you want to cover a large one-time expense, then it will make more sense to receive your payment as a lump sum.
Check your equity
Since you are borrowing against the equity in your home, you’ll need to have a substantial amount of equity for a reverse mortgage to be a viable borrowing option for you. Ideally, you should have paid off your mortgage before considering a reverse mortgage. If you still have a small mortgage, you may need to consult a financial advisor to evaluate your options.
Ask about fees and interest rates
There are associated expenses with reverse mortgages such as closing costs, a loan origination fee, and an appraisal fee. The lender may also require you to see a third-party counselor to completely understand what reverse mortgage is all about. Other expenses include loan servicing fees and mortgage insurance premiums. Overall, all these fees can be up to 3 – 4% of your home’s value. The good news? You’ll not be paying them in cash as your lender will include them in the loan.
Be sure to ask about these fees as well as the interest rate. Ideally, you’ll want a lender with low-interest rates so you can receive more money.
“Since interest rates are a primary factor in determining how much money you can receive, borrowers with the lowest rates will typically receive more proceeds and overall benefits of their reverse mortgage. In addition, lower rates mean better performance of equity retention over the life of the loan. We encourage you to compare,” says All Reverse Mortgage, a company specialized in reverse mortgage.
Talk to family members
If you intend to leave your home as an inheritance to your heir, then a reverse mortgage may not be the right option for you. You have to assume you’ll be using the equity in your home. And your home will be sold to offset your loan when you pass away or move out, say to an assisted living facility or to live with another family member.
If you have any heirs or family members that may be interested in your home in the future, talk to them before getting a reverse mortgage. They may need to pay off the balance of your loan to retain your home.
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