Dorothy, from The Wizard of Oz, once exclaimed, “There’s no place like home!” Your home is probably filled with memories that will always be with you. The place where you live has given you a lot over the years. With reverse mortgages, under the right circumstances, it can provide even more.
As many Americans plan for retirement and turn to alternative sources of post work income, reverse mortgages are becoming more commonplace. The concept of a reverse mortgage is rather simple: someone pays you, based on the value of your home. There are many options available as to how you wish to receive this money. You may choose to take monthly payments, take a lump sum or receive a line of credit.
When you purchased your home, you probably had to make mortgage payments. As you did, you gradually decreased the amount of debt owed and gradually increased the amount of equity in your home. Reverse mortgages are the opposite. As time goes by, you gradually receive more and more money from the lending company. Thus, your debt increases and your equity decreases.
The purpose of a reverse mortgage is to have an added source of income, especially if you plan on selling your home near the end of your life or after you die. It allows you to receive the equity from your home and enjoy it in retirement. The amount you receive in the reverse mortgage is based on the value of your home, current interest rates and your current age. Once you’ve received the amount your home has been determined to be worth, less any fees charged by the lender, you then owe that amount to the lender. You can pay that back any way you wish, but in many cases, the idea is to sell your home and repay the debt. Often, this is done by an estate after a person passes away and still has debt. As long as you’re permanently living in your home, you don’t have to pay the lender back.
Reverse mortgages do have a lot of details and can get complicated, which is why it’s best to ask a professional for advice before diving in. While they may have a lot of technical details, they don’t have many requirements. In general, you must be 62 years of age or older, and own your own home. Those are the two basic requirements of a reverse mortgage. Beyond that, there are a few other basic things to keep in mind. Reverse mortgages do have sizeable upfront costs, just like a regular mortgage. They also have monthly service fees. However, all of the money you receive from the lender is tax-free.
It’s important to know that reverse mortgages aren’t for everyone. The strategy can provide a valuable resource to individuals when the circumstances are right, but there are many considerations before choosing one including fees, restrictions, estate planning considerations, need for income, other assets, health considerations and insurance coverage. Often times a reverse mortgage is a last resort for income. If you want the house to stay in your family for many generations, then it may not be a good option.
If you’re considering a reverse mortgage, get help from someone you trust and seek estimates from multiple lenders before making any decisions. This is not something you’ll want to do without all the information and you’re confident it’s a good financial and emotional decision.
Kris Flammang, a co-founder of LPF Financial Advisors with offices in Lakewood Ranch, is a chartered retirement planning counselor and registered representative with Securities America, Inc. He can be reached at (941) 907-0101 or firstname.lastname@example.org.