When most of us think of a mortgage, the first thing that comes to mind is a long term expense. That’s natural, after all – for plenty of people, a home loan is the largest and most extended bill they’ll pay in their lives.
As it turns out, though, there are situations where mortgages can give back. For retirees and seniors in need of a little extra cash, one of these options is a reverse mortgage, one of several services we offer to our clients at Altius Mortgage. Instead of paying money to a mortgage each month, people in a reverse mortgage actually receive money that they can use for other necessary purposes.
How does a reverse mortgage work, and might it be right for you? Let’s find out.
What is a Reverse Mortgage?
A reverse mortgage, also sometimes known as a home equity conversion mortgage (HECM – this is actually just by far the most common type of reverse mortgage, but others are very rare), is a home loan designed for people over the age of 62. It involves the loan lender taking on monthly payments rather than the borrower, and the loan is later repaid once the borrower either passes away or moves out of the home.
Borrowers still do have to pay homeowners insurance and any taxes or maintenance fees on their home, but they’ll receive payments that represent their equity in their home each month. There are fees attached here as well. Borrowers can receive their money in a lump sum, as a line of credit or as a monthly payment.
Benefits of a Reverse Mortgage
There are several ways a reverse mortgage can benefit you:
- Access to more cash: Retirement is difficult for many people from a cash perspective, and a reverse mortgage is a great way to get a little boost.
- Eliminates mortgage payment: Not only does a reverse mortgage change the typical order of things, for many people it serves as a way for them to pay off their mortgage itself. Many people put the savings from a reverse mortgage toward settling their existing mortgage debt or home equity line of credit. With reverse mortgages, home equity lines of credit cannot be frozen or reset.
- Delay Social Security: Every year you delay social security payments, the larger your eventual benefit – as high as 8 percent a year in some cases. A reverse mortgage is a way for you to put off Social Security a bit longer and avoid other retirement income sources like a 401(k) plan (which are often high in taxes).
- Counseling: Because reverse mortgages are for seniors, and because the home loan market has undergone some changes in recent years, anyone receiving a reverse mortgage must undergo counseling with a third-party agent who can make sure clients aren’t getting themselves into a situation they can’t handle.
- Values can increase: Just like regular mortgages, the value of a reverse mortgage can increase during its life. Line of credit can expand quickly as part of a reverse mortgage.
There are a few potential drawbacks you’ll want to be aware of before you go down the road of a reverse loan. Fees are high, as are mortgage rates. You do have to repay the loan if you move out before you pass away, and you’re still responsible for all other home costs. Most importantly for some people, a reverse mortgage often means your home will not be passed on to future generations in your family once you die. For many people, the benefits of reverse mortgages exceed these risks, but for others they may not.
Ready to learn more? Our brokers at Altius Mortgage are standing by to assist you.