Reverse mortgages have become a popular financial asset for seniors aged 62 or older. Especially as more and more Americans are living longer and outlasting their liquid assets. Here’s some more information on how reverse mortgages are a great option for seniors.
How Reverse Mortgages Are A Great Option for Seniors
A reverse mortgage – or a Home Equity Conversion Mortgage— provides a reliable stream of monthly revenue which can be attractive for seniors who need additional income. A reverse mortgage can relieve the strain of tight finances and fixed incomes while improving the quality of life for many seniors and creating peace of mind for family members.
But, you should carefully analyze this complicated financial tool to fully understand it. Reverse mortgages can help seniors keep their financial independence and standard of living. But they can also be an expensive way to borrow money.
Reverse mortgage solutions run on the idea of negative amortization. This means that interest and principal accumulate indefinitely until the loan is retired. So, unless the value of a home grows over time, borrowers can have little equity remaining after as little as ten years. That’s the trade-off with reverse mortgages. Yes, it’s designed to preserve or even enhance the quality of life for seniors for all of their remaining years. But in the end, two things will happen. The first is that the borrower will either no longer have their home as an asset. Or, heirs will be required to pay off the reverse mortgage balance to retain the home.
But if used properly, reverse mortgages can lessen the chance that seniors will run out of money. With a reverse mortgage, seniors can choose from a number of different payment options. Options include a lump sum payment, lines of credit or monthly payment options. With lump sum payments, the consumer gets one large payment to apply or use as they wish. A line of credit can provide consumers with more security than a lump sum payment because they are able to make withdrawals as needed. With the monthly payment option, the consumer can make a payment to themselves each month.
American retirees and senior citizens are often turning to reverse mortgages because it will let them live in their own home as long as they like without having to continue to make a mortgage payment. Understanding how a reverse mortgage works is important. This way, you’ll know of the risks associated with negative amortization. Meanwhile, the equity in their home becomes a source of monthly income; except it is not treated as income by the IRS, an added benefit. For example, let’s say market conditions caused a a home’s value to suddenly drop. The drop would result in a reduced available equity for monthly income.
The best way to protect against potential problems during the reverse mortgage process is to enroll in a qualified, HUD-approved reverse mortgage counseling program. While required by the Federal Housing Authority (FHA), counseling is in all cases the best consumer defense against financial fraud and abuse against seniors.
Reverse mortgages are a great option for seniors, but the first step is important. By taking part in a reverse mortgage counseling session, seniors can learn about the benefits and consequences to a borrower’s estate, and then measure that against the benefits of steady income and peace of mind during retirement.
The U.S. Department of Housing and Urban Development (HUD) has a database of approved reverse mortgage counselors. These counselors must meet certain criteria and follow certain protocols in their counseling programs.
Reverse mortgages can give a significant financial boost for seniors if used in the right situation. Education and mortgage counseling programs are great tools that help seniors get the knowledge and peace of mind they need. This way, they can decide if a reverse mortgage is the best financial option for them and their families.
Steve Trumble is the President and Chief Executive Officer of American Consumer Credit Counseling.