A reverse mortgage is a type of equity release product (ERP) where your loan is based on how much of your home you own, with the equity loan allowing you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
What is a Reverse mortgage?
A reverse mortgage can be a powerful source of funding for individuals who need to increase their income to be comfortable in retirement. The largest personal asset most retirees possess is their home. In many cases, a retiree’s home is paid off. A reverse mortgage increases income without increasing monthly payments and allows a retiree to stay in his or her home.
To qualify for a reverse mortgage, a prospective borrower must be at least 62 years old and the amount you will be eligible for is based on several things, most importantly, the value of your home, your age, and interest rates. You will be eligible for more money the older you are, the more your home is worth, and the lower current interest rates are.
The Advantages and Disadvantages of Reverse Mortgages
It's important to note the pros and cons of a reverse mortgage. As great as this product is, it doesn't mean it's right for everyone and it is always the best idea to know your goals and to have the help from a trusted financial advisor.
ProsProvides flexible disbursement options (Does not require monthly payments.Proceeds can be used to pay off debt or settle unexpected expenses.The money can pay off the existing mortgage.Funds can improve monthly cash flow.
Fees and other closing costs are typically higher than with a traditional mortgage.Borrower must maintain the house and pay property tax.A reverse mortgage can complicate one’s wish to keep the house in the family.Might be decreasing over time as proceeds are spent and interest accrues on the loan balance.
Is Reverse Mortgage a useful option for homeowners?
Reverse mortgages can be a useful planning option for elderly homeowners in gaining extra cash.
Not only do they provide a steady stream of income, but they also remove what is often the largest monthly expense.
What is more, they have technically considered loan advances and generally not subject to taxes.
Reverse mortgage agreements may also be made between relatives, that means a child might agree to provide his or her parents with cash and obtain the depreciation or other tax benefits associated with homeownership in return."
The information in this article is general in nature. Any advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person.
The article content is not intended to be a substitute for professional advice and readers are urged to seek their own appropriate advice before making decisions.
Any reference to a particular investment is not a recommendation to buy, sell or hold the investment.
Dec 01. 2017