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Is a Reverse Mortgage Right for You?

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Is a Reverse Mortgage Right for You?

 

Handling money in retirement is a complicated business. We want our money to grow, we want to be secure, and we want to try to leave money to our heirs.  Owning a home is a big part of most people’s retirement plans, and so the idea of a reverse mortgage is bound to come up.

What is it?

A reverse mortgage is essentially a loan on your own investment. It isn’t a second mortgage, which is when you’re borrowing from the bank. In this scenario, you’re taking equity against your own equity. When you or your heirs sell your home, the cash borrowed will need to be paid back. The money you receive can be a one time shot, or it can be in the form of a monthly payment.

Why Get One?

There are a number of reasons to get a reverse mortgage. Usually, the idea arises from needing a little extra hard cash. So let’s say your health is great and the doctor thinks you’re going to live to 100, but you only have cash to keep you going until 90. Getting a reverse loan pays your monthly payments until you die, even if you end up living to 110. Or, you can get one lump sum and manage the money on your own, perhaps as an interest bearing investment.

But, of course, nothing is for free. Even though it’s your money, you’ll still have to pay taxes and insure your loan, both of which are costly. Also, you’ll need an appraisal of your home, which is roughly $300, and then you’ll pay an origination fee of, typically, 2% of the appraised value (but is capped at $6000). If you have the money, it doesn’t usually make sense to get the loan.

How Does it Work?

The HUD has a list of FHA-approved lenders, so check out hud.gov. You don’t need to go through a broker for this loan, although it wouldn’t be a bad idea to talk to your financial advisor before you do anything.

To qualify, you need to be 62 years-old, own your home, and you have to live in the home – you can’t do this for an investment property or a ped et terr. Those approved tend to have a low mortgage balance, the idea being when the house closes all costs will be covered by the sale. Having enough money to pay the taxes and insurance is a factor as well.

If you’re married, it’s a good idea to make sure the home is in both spouse’s names. If not, you risk the home owner dying and leaving the living spouse with the burden of paying back the reverse mortgage or selling the house. When you die, the loan must be paid back. If the house is in the spouse’s name, too, the payments continue and they won’t have to pay back the loan.

Once you get approved for a reverse mortgage, you have a few options for borrowing: you can get long-term or short-term monthly payments, a lump sum, a line of credit, or a combination of credit and payments, called a Modified Tenure or a Modified Term.

Getting a line of credit is the riskiest option. In this scenario, the bank takes an interest rate on the credit. So you’re paying the bank another round of interest on your money, in addition to the mortgage interest, they’re already receiving. Make sure you really need the credit before you go this route. Often it’s bad for you and good for the bank.

What Happens When it’s Time to Sell the House?

Your reverse mortgage covers your closing costs, so there’s a benefit. When you sell, the balance is settled up. A great element of the reverse mortgage comes into play here: if your house sells for less than you borrowed against, the bank makes up the difference. Let’s say that you’ve received $250,000 in reverse mortgage payments, but your house sells for $225,000. The bank takes the loss, not the heirs. In this case, the sale price covers the loans. No one has to pay.

But, it’s important to note that there’s no profit here, either, so you won’t leave anything to your heirs. It’s up to you to decide if that’s important to you and your predecessors.

After Fifty Living™ was founded by Jo-Anne Lema, a genuine Boomer and member of the 50+ generation. As she likes to say, “Our enormous generation is charting new territory – we’re healthier, better educated, and more financially fit than any other generation at this time. And, as we march through history, 110 million strong – unique, new issues are developing. It’s exciting to be a part of the development and growth of AfterFiftyLiving.com. This is a historic solution for a historic generation.”

Jo-Anne spent many years in the financial and operations side of higher education after having received a doctorate in education management and administration from Harvard, and an MBA from Southern New Hampshire University. Launching out on her own, though, has been the fulfillment of a life dream. Jo-Anne believes that “AfterFiftyLiving™ will delight its visitors, catalyze its partners, and will significantly benefit those who engage it.”

Residing in New England along with her husband of 35+ years, she never ceases to brag about her two children and 4 grandkids!

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