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With the current financial climate, even the most careful of us can find ourselves in financial difficulty after retirement. The elderly do have a choice, however, to ease the financial struggle of limited income. A federally insured program called reverse mortgage loans or home equity conversion mortgage (HECM) is designed to aid seniors with an additional source of income after retirement.
Reverse mortgages are an ideal option for some seniors but are not for everyone. We’ll be looking over the benefits and responsibilities of a home mortgage which may make it the right choice for your family.
Reverse Mortgage Basics
Very simply, reverse mortgages allow a homeowner to receive payment(s) based on the equity they have built in their homes. They continue to own the home, while the lenders send payment. The interest and other loan costs do not need to be paid until the loan is repaid with the proceeds of the home sale.
To qualify for a reverse mortgage, you must meet a few requirements.
- The youngest homeowner must be 62 years old.
- The homeowner must use the home as a primary residence.
- The homeowner will undergo financial assessment to ensure they are able to continue paying property taxes, homeowner’s insurance, and other maintenance fees on the home. This can include condominium fees, trash removal services, etc.
The last point is perhaps the most important. Homeowners will be required to financially maintain their residence. For this reason, if a reverse mortgage will be your only source of income or if your home is one of your only assets, you may want another option. It’s advised to get professional legal and financial counsel during the course of your reverse mortgage to determine the best ways to proceed.
The Benefits of Reverse Mortgage Loans
Once you have a reverse mortgage loan, you can structure your payments in a lump sum, in payments, or with a combination of both. You may use the money as you like and maintain ownership of your home without making further mortgage payments. The amount you receive is based on several factors, including the age of the youngest homeowner and the home’s appraisal value.
If you have accrued enough equity that there is money left after the home is sold and the loan is repaid, the remaining sum goes to you or your heirs. Because it’s a federally insured program, there are many safeguards in place to protect both homeowners and their loved ones.
The loan only comes due after the last homeowner passes, if the homeowner moves or sells the house, or otherwise breaches contract. Once the loan comes due, only the cost of the home is repaid, with any remaining proceeds going to whomever the homeowner likes. In the interim, the home remains in the complete control of the homeowner.
When to Avoid Reverse Mortgages
As mentioned above, it can be risky to take on reverse mortgage loans if it would be your only source of income, as home maintenance can be expensive. If your home is your only or one of your only assets, a reverse mortgage will also cripple you in case of emergency. Additionally, the older a homeowner is, the more money they receive from loan payments, so it may not make much financial sense to get a reverse mortgage in your 60s.
Finally, if a homeowner wishes to leave the home as an inheritance, reverse mortgages are a very poor choice. The home is used as collateral against the loan and is almost always sold to repay the loan.
Now that you know the basics, you can make a more informed decision about whether a reverse mortgage loan is right for you or your family. In most cases, reverse mortgages offer financial relief during the limited income years of a retiree, using money they have already earned. If you think a reverse mortgage loan might be right for you, discuss your options with a trusted lender.