Demythologizing Reverse Mortgages – What are They Really?

Photo by Jessica Bryant on Pexels

The idea behind a reverse mortgage is quite simple, rather than getting a home loan and making payments to the lender, the lender makes payments to the homeowner. These payments can either be a lump sum or a monthly payment. Either way, loan repayment is not required until the homeowner passes on or moves out of the house. Apart from this, there is one more option to consider if you already have an existing mortgage and that is refinance a mortgage.

Financially, the amount you can borrow is a function of the homeowner’s age and the value of the home itself. The older the homeowner is, the more they can borrow. The primary purpose of a Reverse Mortgage is to improve a homeowners long term retirement funding; it enables them to access the home’s savings without needing to sell it. That way, the home can literally be the best place to live and to take care of retirement. 

Even though a reverse mortgage may seem like a good idea, the reality is that they may be quite controversial. While a reverse mortgage may seem like a sensible solution for retirees who need extra money by tapping into their most valuable asset, it is still a loan. Interest, service fees and mortgage insurance will all be assessed and added to the loan balance, and these costs can add up significantly over time. 

It is essential to settle any misconceptions and myths about reverse mortgages, and what better way to do this than looking into the positives and negatives.

Positives:

There is the potential to receive regular income as long as the homeowner occupies the home as their primary residence. 

Payments from a reverse mortgage are not considered taxable income. 

The key benefit is to improve long-term retirement funding, enabling the owner to increase retirement income and improve retirement lifestyle. 

Homeownership is never given up, so the lender cannot take ownership of the house. They retain full ownership, including any future increase in property value.

There are flexible payment options; repayment can be flexible and at the homeowner’s discretion. Monthly or lump sums, it is entirely up to them and their lifestyle. 

It is a guaranteed place to live; the homeowner can live in the home as long as they want, they are required to keep up insurance, property taxes and maintenance for the home. 

Negatives: 

There may be upfront fees, such as closing, insurance costs and origination fees, and these fees may be relatively high. 

Interest accumulates; whilst there are no monthly payments on a reverse mortgage, the loan amount that will need to be paid back will grow over time. Every month the amount owed increased; however, the amount owed on the loan will never exceed the home’s value. 

Heirs inheritance may be reduced. Many people dismiss Reverse Mortgages as a retirement option because they want to be sure their home goes to the heirs. This is true. A Reverse Mortgage decreases home equity affecting the estate. The house will still go to the inheritors, but the equity will be less. 

So, there is it, reverse mortgage demythologised. Noe, the question is, do the advantages outweigh the disadvantages? Studies do indicate that more than 90% of households who have a reverse mortgage are happy. They have less stress and are free to live the life they want. It depends on the person and their future plans. But research is always worthwhile.