Imagine the bank depositing monthly checks into your account instead of you writing a mortgage check. That is one way a reverse mortgage can work.
Traditional mortgages involve people paying down the interest and principal on a home loan. The goal is generally to pay off the property and enjoy retirement without that monthly installment. A home that has been paid off means that those previously allotted finances can be used to relax and enjoy your retirement to the fullest. That is a best-case scenario!
But economic life has changed significantly over the past half-century and more so in recent years. The formula for economic security has been chipped away by rising health care costs, tax increases, and other complications. Working hard and paying off your family home may no longer equal financial flexibility later in life. Older adults in everyday American communities may require additional resources and the reverse mortgage has been a viable option for many.
How A Reverse Mortgage Works
The product was created to allow homeowners who are 62 and older to convert a portion of their home equity into cash flow. Rather than you pay the bank, the roles are reversed, and the lender or servicer pays you. Homeowners are required to stay up to date on property taxes, homeowners insurance, and other property charges. They must occupy the property. The loan is paid back upon a maturity event: the last borrower no longer occupies the home.
Types of Reverse Mortgages
The HECM ( home equity conversion mortgage) is the FHA government-insured reverse mortgage which today is the most popular in the United States. It is the only reverse mortgage insured by the federal government, and because of their involvement, lenders can offer these loans with generous financing terms. HUD regulates the program and FHA is the insurer. It is a federally insured loan product that allows homeowners age 62 or older to access a portion of their home equity in cash, monthly payments, or a growing line of credit. In a traditional loan, funds ( payments ) move from a borrower’s bank to a lender or servicer. A reverse mortgage loan moves funds from the lender or servicer to the borrower. Thus, it moves in reverse. Today proprietary reverse mortgage loans which are not FHA insured yet follow HUD guidelines, are available to homeowners whose home values are higher than the maximum claim levels established for the HECM.
Benefits of a Reverse Mortgage
When people discover that their pension, 401(k), and savings will not necessarily carry them through a comfortable retirement, selling the family home and downsizing emerges as one of the solutions. But reverse mortgages can offer an alternative by providing the following benefits.
Age in place: Reverse mortgages allow homeowners to stay in their home as long as they occupy the home, pay property taxes, homeowners insurance, and other applicable property charges.
Improved cash flow.
Eliminate Mortgage: For those who still have a monthly mortgage payment, a reverse mortgage can pay off the outstanding balance.
Reverse mortgages can be an excellent tool to improve your quality of life during retirement when included in an overall financial plan.
To learn more about reverse mortgages, contact your local certified Reverse Mortgage Professional (CRMP) for guidance and expertise.