You have seen the commercials, but the benefits of reverse mortgages are commonly misunderstood. This is especially true when it is used as part of a broader financial plan which allows the borrower to maximize access to the equity in their assets, whilst retaining ownership. Some of these strategies include using a reverse mortgage to increase monthly cash flow, to buy a home, or to spend down the equity without the tax implication of a sale.
Just like the name sounds, a reverse mortgage is not your traditional loan as you don’t need to make regular interest or principal payments over time. Instead, a reverse mortgage freezes the mortgage payment while allowing you to tap into the equity, until you either sell your home or establish residency elsewhere. Given how reverse mortgages work, these loans have numerous benefits over home equity loans and these have become much more popular in recent years.
Does a reverse mortgage sound interesting? Well, it should. However, you need to be at least 62 years old to qualify for these loans. If you are below this age, then you will have to wait to enjoy the benefits of these mortgages.
1. Increase Monthly Cash Flow
Assuming you meet the age requirement, then let’s looks at the benefits. The first of which is probably the most obvious. You can use a reverse mortgage to pay off your existing mortgage and any other debts. This approach can literally free up thousands of dollars a month. Money which can go to cover other living expenses or can be set aside for savings.
A reverse mortgage is even a good idea for people with bad credit. While some lenders have begun checking credit scores, the basic criteria for these loans is to prove you have enough income to pay your property taxes, insurance, and utilities. As you can see creditworthiness does not really play into the mix when applying for a reverse mortgage.
The result is that a reverse mortgage helps you keep money in your pocket. Who can argue with that?
2. Buying a Home
In 2008, the Federal Housing Administration (FHA) changed the rules of the Home Equity Conversion Mortgage (HECM) to allow for the purchase of property. The program is call HECM for Purchase and it can be used to buy a residence by using a reverse mortgage.
This program allows seniors to buy a house without needing to make any loan payments. Think about it. You can get the home of your dreams with only a down payment. No need to waste your hard-earned dollars on a mortgage payment. If this sounds interesting, then calculate various payment options here.
An added benefit of using a reverse for buying a home is that it allows you to keep your savings intact. Granted, you need to come up with the cash for the down payment, but that’s it. As such your savings and other investments can continue to go to work for you.
3. Spend Down Equity Without Tax Implications
If you sold your home, you would need to either reinvest the money or pay capital gains. A reverse mortgage is a better way. You can tap into the equity you have built up in your home, without the implications of a sale. In addition, these funds can be used for a variety of purposes. You could use the funds to pay for medical expenses, for travel, or even to reinvest.
Granted there are some exceptions to the capital gains on selling your home, but even the $500,000 exclusion does not apply to everyone. There is a better way and a reverse mortgage is that way.
There is no denying that reverse mortgages are becoming increasingly popular. However, there are not for everyone. One potential downside to a reverse mortgage is that the home will need to be sold once the borrower no longer resides in the home.
That being said, FHA reverse mortgages are ‘non-recourse’ loans. This means that the borrowers heirs will not face any penalties if the house sells for less than the balance due on the mortgage. However, you don’t want to assume this is the case for all reverse mortgages as some non-FHA insured reverse mortgages might have different terms.
As you can see, a reverse mortgage offers a number of benefits and an increasing number of savvy borrowers over the age of 62 are using these loans as part of their financial planning strategy.