Reverse Mortgage to Supplement Retirement
Warning: Reverse mortgages do not build your net worth and should only be used in certain situations. Even so, they are typically not the best answer.
Reverse mortgages have been gaining in popularity over the last years with seniors that are experiencing that the traditional retirement tools are no longer sufficient. Pensions, IRAs... are no longer providing enough money to pay for their health-care or living.
What is a reverse mortgage?
A reverse mortgage consists of the bank that pays the homeowner and not vice versa. Of course a homeowner has to meet up with some qualifications like, he has to have a significant amount of equity built up and must be 62 years or older. If you opt for reverse mortgage you can get your money in four different ways. You can choose to receive a monthly cash deposit, get a lump-sum payment or get a line of credit. The fourth way is a combination of these try types. Reverse mortgages usually don't have income restrictions and the proceeds are generally tax-free.
What are the catches?
If you choose a reverse mortgage you will have less money available when you have a crisis or an emergency. The equity in the home is diminished and lots of people would like to leave the equity that's been built up to their heirs.
Costs
The first cost that will need to be paid is the appraisal. This will be the one cost that you'll have to pay at the beginning of the reverse mortgage. Other costs like origination fees, mortgage insurance premiums up to 2%, third-party closing costs and servicing fees will be spread out. A lender could also charge you with adjustable interest rates for the reverse mortgage.
Are they going to take away my house?
No, definitely not. Lots of people worry about the bank taking away the house, but the house is still yours. If you move or if you pass away, the loan has to be paid off by you or your heirs.
Here are some tips to think about before considering a reverse mortgage.
Before stepping into this kind of loan, you should always get as much information as possible.
- Look into all options before choosing a reverse mortgage.
- Consider if the reverse mortgage is the best option or that it would be better to choose a home-equity loan or another kind of loan?
- Are you moving in three or four years, than a reverse mortgage is not the best idea.
- Do you need the loan right now or can you wait? The market is still developing big time and you'll surely get better chances if you wait just another one or two years.
- Maybe you could just sell your big house and move into a smaller one, now that all the kids are settled. Downsizing your house can be a good thing to do to free up some funds without all the costs.
- And if you do want to have a reverse mortgage, calculate how much you will get from it. Compare finance companies and do some research.
- If you've signed up for a reverse mortgage, you will normally have three business days to reconsider. If you decide to cancel you will have to do this in writing and all the costs you have paid for, will have to be returned to you.