Make Informed Decisions for a Stress-Free Financial Future
After years of hard work and saving, you have finally retired, but lately, you’ve found yourself worrying about your financial future. With consistent inflation, rising healthcare costs and the desire to enjoy your retirement, you’re fearful that your nest egg might not last as long as you wanted.
You may have heard nightmare stories about reverse mortgages, or you may not even be familiar with what they are and how you can put them to work for you. Either way, navigating financial decisions in retirement can feel like a major task. There are pros and cons to every financial product, and understanding those associated with the one that you are considering is a necessary part of the process.
Whether you are running out of funds, need money for a recent health diagnosis, or just want some extra cash to enjoy your retirement years, a reverse mortgage can offer supplemental income for living expenses, emergencies, or enjoyment. By tapping into your home’s equity, you may increase your sense of financial security without dipping into your savings.
One of the most attractive features of a reverse mortgage is that you aren't required to pay mortgage payments if you are still occupying the home as your primary residence. This can lift some of the financial strain you may have been feeling and allow you to create a budget for your available income without worrying about emergencies.
Having the choice to spend your retirement years in the house that you have made a home, full of all of your old memories, leaves you imagining all of the new ones that you will make. Tapping into your home’s value with a reverse mortgage gives you the flexibility to stay in and care for the home you love, while remaining independent.
Even if you decide to use a reverse mortgage, the funds you receive will generally be considered loan proceeds, which is different from income, so it will not typically affect social security or medicare benefits. But, it will provide a safety net if you are relying on these programs to cover the majority of your monthly expenses.
Depending on your financial situation, you will typically have three different payout options for receiving the funds from a reverse mortgage. Here is a brief overview of each option:
From a safety perspective, reverse mortgages are a type of loan product called a “non- recourse” loan and guarantees borrowers can stay in their homes for the rest of their lives. This means that borrowers or their heirs will never owe more than the home’s value when it is sold and will not require short sale or foreclosure. If the home value declines, the debt burden will not increase, making it a safe financial option in an uncertain real estate market.
If you need support with rising healthcare costs or are considering getting assistance with household maintenance or daily living, a reverse mortgage can supply the funds you may need to pay for any home-based assistance or modifications to improve accessibility.
Even if you just want to enjoy your retirement more fully, you deserve to leverage the equity you have built for just that. Whether you want to travel, pursue your hobbies, or help family members, embrace your retirement without constant worry about expenses.
Interest on a reverse mortgage isn’t tax deductible yearly, but it may be tax deductible if the loan gets repaid, generally when the home is sold. This tax benefit may work in your favor when it comes to estate planning. Be sure to consult a tax advisor about the tax implications of a reverse mortgage.
As the homeowner, you will continue to benefit from any future appreciation and when you decide to sell, you will retain that equity after paying your loan balance. If you live in a state that has property tax exemptions, you can keep your senior and homeowner exemption status as well to keep tax costs at bay.
A reverse mortgage accrues interest over time, which can eat into the home’s equity and reduce the value left in the home for your heirs. If leaving a legacy through home equity is important, then a reverse mortgage may not be the right fit for you. On the other hand, if you do get a reverse mortgage while you are living it allows you to supplement your diminished income without digging into savings, and you may be able to enjoy the financial benefits of your home equity with your heirs.
Just like with any loan, there are fees associated with a reverse mortgage, such as appraisal fees, mortgage insurance, origination fees, and sometimes even monthly maintenance or service fees. Make sure you discuss all fees and costs with your counselor and lender up front so you are prepared for any financial impact they may have on the loan over time.
Navigating the reverse mortgage process alone can be very overwhelming. You must identify a reputable source to start your journey, that will lead you in the right direction and make sure you are informed every step of the way with someone who puts your needs first. Click here to access a list of HUD-approved lenders.
In a traditional loan, you pay interest as you make payments toward your loan principal each month. With a reverse mortgage, interest compounds over time, which means that the loan balance will grow based on principal and accrued interest. So yes, you are paying interest on the interest. There are ways to combat this though by making monthly payments. Be sure to discuss the details with your perspective lender.
If you borrow too much, a reverse mortgage can deplete your home equity, which may limit your options later on if you need it for emergency expenses or healthcare needs.
To qualify for a reverse mortgage, you must live in your home as your primary residence. If you have to move, your loan may come due, even for extended medical care.
Any reverse mortgage borrower must continue to pay property taxes, homeowner insurance and any other maintenance costs and utilities. Failure to maintain the required financial obligations or the property in livable condition can lead to default and even foreclosure.
Although a reverse mortgage doesn’t have an impact on social security or Medicare, it may prevent you from being eligible for other programs like Medicaid, food and housing assistance. Make sure you speak with your counselor, lender and the department of public health in your state to get a full understanding of the details if this is something that concerns you.
As with any industry, there are some bad apples that want to mislead you into paying high fees or use doomsday scare tactics to get you to make a decision. Some seniors have experienced high-pressure interactions with lenders, ensuring a reverse mortgage as a quick solution, which leads to financial decisions that may not be in your best interest. Seek guidance from an objective third party like the Reverse Mortgage Academy to avoid these risks and for guidance along the way. [Get Started Now]
If you own a condo and you are looking to get a reverse mortgage, your condo usually must be approved by the Federal Housing Administration or FHA. Not all condo buildings and associations will meet these standards and if you request to work with the condo association board for approval, you may experience push-back as it can be difficult to qualify with minimum reserve contribution, owner occupancy and other requirements.
Before even going so far as to ask anyone else about a reverse mortgage, assess your own financial needs. Would a loan truly benefit you in the long run, or would you be setting yourself up for financial failure? Do you need to implement a real budget and understand your monthly income and costs before taking the next step? All of these are important questions to ask. Your HECM-approved counselor will also work with you to understand your budget and financial needs. If a reverse mortgage is not the right fit, they will also be able to point you in the right direction for what financial product will benefit you in the future.
Work with your HECM counselor at the Reverse Mortgage Academy to create a list of all of the referrals you have received and build a team of professionals that will protect your best interest while keeping you informed and confident in your decisions.
You must always read any terms and conditions of a financial agreement very carefully so you are fully aware of the implications, costs and any other impact a loan may have on your long term financial goals. Having an attorney to read over the legal jargon in any financial contract is a good idea and will give you peace of mind that everything you worked hard for is safe.
Whether you are getting a reverse mortgage or buying a car, it is always important to understand the pros, the cons and the risks. These are the facts, but you may have also heard people talk about how bad a reverse mortgage is for a borrower. Our myth busting blog will give you some insights to push back the skepticism and get the answers you need to make an informed decision that is best for you
