While life may seem more uncertain as you grow older (and wiser), the only thing you can be certain about is expenses. Expenses are inevitable and will increase as you grow older. You may have certain unfulfilled dreams, travel plans or unexpected expenses that pop up.
Luckily, there is a finance option available for you, a reverse mortgage. Once you cross the age of 55 years and own your house outright or if you have a low mortgage balance, you may qualify for a reverse mortgage. A reverse mortgage will increase your cash flow, allowing you to purchase an investment property, buy your retirement home, or use the funds to enhance your retirement years.
How does it work?
A reverse mortgage allows older citizens who own their homes to be able to receive monthly payments or a lump sum, whichever option is best suited for your needs. To qualify for a reverse mortgage, you will be required to secure your home as collateral.
Unlike a mortgage where you are required to make payments, a reverse mortgage lets you receive payments. With a ‘Reverse Mortgage’, you will not make any payment. The only criteria required to apply for a reverse mortgage is your age, and you must have equity in your home.
A reverse mortgage can be used for:
- Receiving monthly payments if you have no or small mortgage payment
- Increasing your monthly cash flow if you are still trying to pay off your mortgage.
- Buying your retirement home instead of renting
- Buying an investment property to increase your net worth. While the home you keep as collateral will have to be your primary residence, you can use the cash proceeds from the reverse mortgage to purchase a second home or an investment property.
- Receiving extra income.
You will still be required to pay for your ongoing home/property tax and insurance.
With a reverse mortgage, you are essentially converting part of your home equity into cash. You can, therefore, enjoy the cash flow coming in, either on a monthly basis or as a lump sum to best suit your lifestyle.
When it comes to a lump-sum payment, you receive all of the proceeds from the loan upfront at a fixed interest rate, and it requires forfeiture of the remaining amount of the loan. The sum is subjected to first-year withdrawal limits, which are about sixty percent of the applicant’s initial principal limit.
On the other hand, the option of monthly payments ensures that the borrower is paid a monthly amount if the borrower lives in the home or for a fixed number of years, depending on the terms of the loan.
For borrowers who plan to stay in their home a long time, this option can be beneficial because the value of the loan will grow as the value of the home increases. This option is ideal for borrowers who anticipate staying in their home for many years and who are not dependent on the income, as the loan ends when the borrower moves out of the house.
A third payout option that exists is ‘Line of Credit’. Like the monthly payment option, a line of credit has built-in limits that can help retirees allocate the money thoughtfully over long periods of time. A line of credit allows borrowers to withdraw money when needed. However, the loan amount could grow over time if a house’s value increase, which means an increase in the amount of available funds.
Depending on the type of reverse mortgage, borrowers also can combine these reverse mortgage payout options, such as taking out a small lump sum and receiving the remaining amount in monthly payments.
Reverse mortgages can be considered as a kind of pension income. While you don’t need to make any regular payments on a reverse mortgage, you have the option to repay the principal and interest in full at any time. Interest will be charged until the loan is paid off in full and the interest will be added to the original loan amount, which increases the loan amount over time.
The loan and interest incurred during the life of the reverse mortgage will be repaid in the event of your death or if you plan on selling your house.
Should you apply for a reverse mortgage?
While every option has multiple aspects to consider, the experts at The Prestige Home Financing Group will help you make the best decision based on your current and future requirements.