Everything you need to know about reverse mortgages

It’s common to view your home as your biggest asset. However, it’s difficult to tap into the value of your home, since it’s wrapped up in something tangible. If you aren’t ready to sell your home, but you want to make use of the ownership that you have in it, you can use a reverse mortgage to help you fund your retirement.

WHAT IS A REVERSE MORTGAGE?

A reverse mortgage is a type of home equity loan. It’s called a reverse mortgage because you receive money, but you don’t have to begin paying it back immediately like you would with a more traditional home equity loan. Your reverse mortgage doesn’t have to be repaid until you move out the home, stop using it as a primary residence or die.

Many lenders offer reverse mortgages, but your best bet is to use a lender that goes through a government-backed program. To qualify for these types of mortgages, you need to be at least 62 years old. A government-backed program comes with protections like allowing you (or your heirs) to pay less than you owe if the market value of your home has dropped.

You should also understand that there are fees and interest charges with reverse mortgages. Because reverse mortgages are based on the equity in your home and not your credit situation, the interest and fees can be higher than what you would pay with a “regular” home equity loan.

As long as you understand these realities, and you are prepared to sell your home if you can no longer use it as a primary residence (or have your heirs sell it if you die to pay off the loan), a reverse mortgage can be a tool to help you fund your retirement while you stay in your home.

3 WAYS TO USE A REVERSE MORTGAGE TO FUND YOUR RETIREMENT

When you run into retirement challenges, and if you have most of the equity in your home available to you, it’s possible to use a reverse mortgage to help you manage your cash flow. Here are 3 ways that you can a reverse mortgage to help your retirement:

  • Equity as a resource in times of distress: If you run into financial trouble during retirement, your equity can be a helpful resource. An emergency, like your car breaking down, a broken appliance or some other unexpected expense, can be handled with the help of your home’s equity. You can receive your reverse mortgage as a lump sum to take care of the temporary problem. And, because of the way a reverse mortgage works, you don’t have to repay the loan immediately, allowing you to avoid further strain to your finances.
  • Pay off your current mortgage: One of the biggest problems in retirement is dealing with regular obligations on your income. Any debt can become problematic since you have to make the payment regularly. A reverse mortgage can help you get rid of some of those obligations. If you are still paying on your mortgage, you can use a reverse mortgage to “refinance.” Pay off the mortgage with the reverse mortgage, and as long as you live in your home, you won’t have to make another payment.
  • Manage your cash flow: Finally, you can use a reverse mortgage to help improve your monthly cash flow. It’s possible to receive your reverse mortgage in monthly installments, rather than a lump sum. If you are looking to add $200 or $300 (or more, depending on how much equity you have in your home) to your monthly income, you can use a reverse mortgage. It’s one way to stretch your budget a little bit every month.

While a reverse mortgage can be a good retirement planning tool, you should realize that it’s probably not enough to replace your entire retirement fund. It’s a good way to help you manage your money more effectively, and stretch your budget, but unless your home is worth more than $1 million, it probably won’t replace your entire portfolio.

You still need to plan to save up, create a budget for your retirement years and budget for your expenses. A reverse mortgage won’t solve all your problems, but it can help you take care of the unexpected and smooth your cash flow.

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investing for retirement ebook ipad - McClain Lovejoy
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