Often when people retire, they are mostly worried about the next step, when it comes to financial sustenance, now that they are out of a job. While medical expenses may be on the rise, there are still debts to pay, monthly utilities to buy and day-to-day living expenses that need to be financed. Thankfully, there are a number of loans available to seniors post retirement, with favorable terms and conditions that make it easy to pay for. If the individual has crossed 62 years of age, they can opt for a reverse mortgage loan and convert their home equity into cash, without worrying about monthly mortgage payments. They will get to live the rest of their lives in comfort, while the mortgage payment is made only after they move out of the house or pass away.
How Reverse Mortgage Loans work
Once a senior has retired, they can take a reverse mortgage loan against the house they are the primary owner of. The lenders will evaluate the financial worth of the house, and decide what the loan amount will be. A percentage of the house’s value will serve as the interest that is added every month to the loan amount. In the meanwhile, the homeowners get a monthly payment, which they can subsist on or use as they see fit. Once the senior has either died or decided to move out of this house, the loan amount has to be repaid. Often, these payments are made after the senior has died. The debt is carried forward to the heir or family members as stipulated in the will. The house can be sold to repay the loan or the heirs can refinance the loan in order to keep the house. Failure to pay the loan might result in the lending company selling off the house themselves, in order to get the loan amount paid.
Is Reverse Mortgage Loan a Good Idea?
It’s important to understand the different reverse-mortgage pros and cons, before opting for this type of mortgage loan.
Pros
- No monthly payments: The best part about reverse mortgage loans is that borrowers can benefit from the loan for the rest of their lives, without worrying about monthly payments. Unlike traditional loans, you do not require a very large monthly income to qualify for a reverse mortgage loan, which makes it ideal for seniors looking for some financial assistance post retirement.
- Funds can be used for anything: You get to decide how you want the money to be loaned to you. This means that seniors can decide whether they want the loan in a lump sum amount (ideal for buying new houses), monthly payments for life or an agreed upon term, or as a flexible line of credit as and when needed.
- Guaranteed line of credit: So long as the homeowner remains eligible for the loan, the Department of Housing and Urban Development (HUD) will guarantee available funds for the rest of his or her life. With traditional loans, banks have at times frozen payments or lines of credit, without giving advance, if they feel the homeowner can no longer repay the loan within a certain amount of time. In the case of a reverse mortgage line of credit, this is not a problem.
- You can buy a new home: With a reverse mortgage loan you can not only get payments for the house you are living in, but also be able to purchase a new home. This is ideal for seniors who want to downsize their housing options, live within a lower income or move closer to family or safer neighborhoods.
Cons
- Higher closing costs: Depending on the valuation of the house as security, reverse mortgage loans can be very expensive. In the case of government-backed reverse mortgage loans, borrowers have premiums at 2% for upfront payment and 0.50% for annual renewal mortgage insurance payments. These amounts can be considerably large when the loan is close to closing. Borrowers may not have as much of an income at the time of closing as they did when they took the loan.
- May not help need-based programs: If borrowers rely on flexibility on line of credit for medical expenses, they may lose tracks of funds with increasing medical costs. This, in the long run, may nullify their eligibility for the loan, because the closing amount may run to exorbitant heights.
- Manipulative opportunists: Unfortunately, there are many opportunists that prey on trusting seniors for personal gain. They may encourage the recently retired seniors to use the loan funds to make bad investments, help families who are not doing well financially or pay for caretakers that do not treat them well. So the reverse mortgage loan leaks into unnecessary expenses and is hard to pay back at the end.
- Spousal protection not included: Up until recently, spousal protection was not included in a lot of reverse mortgage loan schemes. But thankfully, in 2015 the HUD made necessary changes in their guidelines, protecting spouses under 62 years of age as the ‘eligible non-borrowing spouse’. They would have to maintain the house regularly, pay property taxes and insurance fees on time, and live in the house as primary residents. Non-borrowing spouses do not, however, get direct access from the loan or use the line of credit even after the main borrower has passed away.
Also Read: Five Smart Ways to Achieve Financial Freedom in 2022
