Do you plan to retire soon or are you already retired? If so, you probably know retirement comes with many benefits, but it also comes with some challenges. One challenge is a reduction in your income. A reverse mortgage can help you combat that by allowing you to tap into part of the value of your home as actual money you can spend.
Why a Reverse Mortgage is Only Good During Retirement
A reverse mortgage is specifically a retirement loan because you cannot get one when you are under 62 years of age. They originated to help older citizens on reduced incomes avoid the foreclosure risks that come with standard home loans. They are less risky because you are not required to repay it in set amounts or on set dates. Therefore, you cannot miss payments and go into default in a traditional way.
A reverse mortgage is also good during retirement because it actually requires you to remain in your home. For as long as you do, you do not have to pay back the full balance to your reverse mortgage lender. Therefore, you can have a sense of security in the fact you are safe in your home. This type of mortgage also gives you the freedom to focus on the things you want to do during retirement without as many financial worries as you would otherwise have.
What You Need to Know About Reverse Mortgage Calculations
When you are applying for a reverse mortgage, the first thing you may wonder is how much you can borrow. You can use a reverse mortgage calculator to figure that out. The calculator uses special formulas to figure out what amount you can borrow. It is necessary because there are so many things that can influence the total value of your home, such as where it is located and its age. Also, there are federal guidelines that regulate reverse mortgage borrowing percentages.
Choosing How to Receive Reverse Mortgage Payments
Determining how much you can borrow with a reverse mortgage is only one part of the process. You also have to decide how you want to receive your money. You have the flexibility to choose the types of payments you want, but you can only borrow up to the amount determined by the calculator linked above. One common choice is to receive monthly installments of equal size for a set number of months. Doing so can make bill payments easier. However, you can also request a single big payment from your lender.
A third option you may not have considered is using your home somewhat like a credit card. To do so, you can open up a home equity line of credit. A home equity line of credit allows you to set a top amount you can borrow. Then you can borrow the money in the increments you want whenever you need it.
There are some long-term implications of a reverse mortgage you need to consider before applying for one. For example, they can accumulate large amounts of interest because they are long-term loans. Also, if you do not pay a reverse mortgage back when you leave your home, it can be sold so the lender can recover some or all of the owed funds. Therefore, a reverse mortgage can be problematic if you want to leave your home to your heirs.