Today’s American retirees have to change their retirement plans due to changes in the retirement horizon. First, retirement lasts much longer. With life expectancy at almost 79 – and even many people live past 90 – retirement savings must now last for possibly 30 years.
In addition to the longer life expectancy, government and employee pension benefits are being reduced or even phased out. This double penalty of reduced pension income and more years of retirement places a financial burden on many Americans.
Many people are reluctant to start dipping into their investments early because of tax penalties and lower-income. Others find borrowing options – such as second mortgages, home equity lines of credit, and other types of non-traditional loans and lenders – to be too expensive or greatly reduce their disposable income.
Reverse mortgages are increasingly popular with Americans aged 55 and over. Here we present to you the pros and cons as well as misconceptions about reverse mortgages to help you know if this type of mortgage is suitable for you.
- You could access more than half of your home equity, tax-free, without having to make regular mortgage payments and without negatively impacting your cash flow.
- Reverse mortgages allow you to cash in on your most valuable asset.
- You stay in the residence as long as you want along with enjoying any future benefits in the appreciation in the price of your property.
- You can spend the money you receive the way you want.
- You can avoid withdrawing money from your saved savings or cashing out your investments that have not yet matured, which can help you pay less tax.
- You can free up more of your money in the future if you don’t take all the money at once or if the value of your home rises.
- You can opt to receive the funds as a lump sum, a series of advances, or both.
Cons and misconceptions:
- You will have to shell out more money as fees and interest rates compared to what you would have paid with a traditional mortgage. However, the reverse mortgage doesn’t have a high-interest rate compared to a second mortgage, credit card, an unsecured line of credit.
- It’s too good to be true? Well no! While you don’t have to make any regular payments, all you have to do is pay off the loan amount and interest once you decide to you’re your house or move to another location.
- The loan balance increases over time. Yes, unless you decide to make interest payments where the principal borrowed is going to be the money owed when you choose to move or sell.
- If you want to pay off your mortgage in the first 5 years, then there will be an early payment charge, which you will have to pay.
- It won’t be possible for you to borrow money as security for your property in the future.
- Is selling your property and buying a smaller home a better option? While this option works for some people, it can cost a significant amount of money in brokerage fees, title transfer fees, and legal fees. You will have to move to another city for this solution to be financially viable. The financial and emotional aspects make this option less appealing.
Who is a reverse mortgage for?
- Retired people who want extra income – Reverse mortgages are suitable for people who need cash or need to consolidate debt along with reducing their monthly payments.
- Those who own a home, but have little to no cash – Using this method, people who have a house but are left with hardly any cash to spend get a decent amount to pay off their debts during their retirement period.
- Retirees who are determined to stay in their homes – Regarded as a powerful financial tool, a reverse mortgage allows almost all Americans to stay independent even after their work life.
Financial savvy people – Those looking to take advantage of the equity in their home by including it in their overall retirement plan and financial strategy.