What Exactly Is a Reverse Mortgage?
A reverse mortgage is a type of home equity loan for homeowners age 62 and
older.
Unlike a traditional “forward” mortgage, reverse mortgages do not require monthly payments toward the loan balance. And, reverse mortgages pay off existing mortgages and eliminate monthly mortgage payments.
However, as you tap into your home equity, the loan balance grows. Borrowers repay the loan balance when they sell the home or move out — usually using the proceeds of the sale of the home.
Advantages of a Reverse Mortgage Right Now
You can stay in your home.
Having the confidence that you can stay in your home is more important now
than ever before.
With a reverse mortgage, you retain home ownership and the ability to live in your home no matter what. You must keep up insurance, property taxes and maintenance for your home, but it is yours to live in as long as you want.
Home Values
The more your home is worth, the more money you can tap with a reverse
mortgage loan.
Home prices in most areas have been historically high recently but it is unclear
whether home prices will remain strong, or not.
It Can Be a Good Hedge and the Line of Credit Limits the Costs of the Loan
None of us know what is going to happen in the future. Having access to money can be a good hedge against uncertainty. And, a reverse mortgage can give you that kind of optionality. Furthermore, a reverse mortgage line of credit can make the loan more affordable and appealing.
A line of credit is a source of money that is made available to you by a financial institution. While there are many different types of lines of credit, you do not pay interest on the money that is available to you until you withdraw the funds from the line of credit.
So, when you have a reverse mortgage line of credit, you have money that is available to you — but you only accrue interest on the money you withdraw. So, the reverse mortgage line of credit acts as an excellent backup source of funds.
Line of Credit Grows, Protecting You from Falling Home Prices
In addition to being a great safety net option, other key benefits to a reverse
mortgage line of credit include:
● Growth: Not only are you not paying interest, but your untouched reverse mortgage line of credit can grow in value. Money in a reverse mortgage line of credit grows at the same rate as the interest rate on the loan PLUS 1.25% monthly. So, if the interest rate on your reverse mortgage is 2.50%, then your line of credit will grow at 3.75% (2.50% + 1.25%). This growth is unique to reverse mortgage lines of credit — a HELOC for example does not grow.
● Hedge Against Falling House Prices: The growth in a reverse mortgage line of credit is guaranteed — without withdrawals, your line of credit is guaranteed to grow.
All of the Other Advantages of a Reverse Mortgage Still Apply
The main advantage of Reverse Mortgages is that you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home.
In good economic times and bad, the key advantages and benefits of reverse mortgages include:
● Flexibility: Use the money any way you want or need.
● No Downside: With a Reverse Mortgage you will never owe more than your home’s value at the time the loan is repaid, even if the Reverse Mortgage lenders have paid you more money than the value of the home. This is a particularly useful advantage if you secure a Reverse Mortgagevand then home prices decline.
● Tax Free: As a Reverse Mortgage is a loan, the money from it is typically tax-free, whether you receive it as fixed income or in a lump sum.
● Federally Insured: The Home Equity Conversion Mortgage (HECM) is the most widely available Reverse Mortgage. It is managed by the Department of Housing and Urban Affairs and is federally insured. This is important since even if your Reverse Mortgage lender defaults, you’ll still receive your payments.
● Proprietary Options: For higher-value homes, there are several “jumbo” options available with higher lending limits and alternative fee structures.
