Have you given much thought to the level of income you’ll have once you retire? The answer to this question will probably depend on your age, but the fact remains that there is a tendency to experience a drop in income once you stop working. This situation understandably causes worry, but avoiding the issue definitely doesn’t make it go away!
A much better approach is to start planning your post-retirement finances. Having a personal pension plan in place and making regular contributions is a great place to start. Your employer may well make additional contributions to this as part of your contract.
Taking out a traditional home loan to finance your retirement once it arrives is an option, but it exposes you to the risk of losing your property to the lender if you fail to meet repayments.
Another option that guarantees financial support with less risk is a reverse mortgage.
What is a reverse mortgage?
As with a traditional mortgage, a reverse mortgage allows you to use your home as security for a loan. You don’t make a regular repayment with a reverse mortgage; instead, the loan is repaid when you no longer live in the home, usually by selling the property. Reverse mortgages incur fees and interest, so the amount of the loan increases over time.
Put another way, a reverse mortgage is a long-term loan that provides you with the freedom to enjoy a post-retirement lifestyle, without the pressure of repaying your lender.
The advent of Home Equity Conversion Mortgages (HECMs)
Reverse mortgages have evolved since their introduction in 1961. These changes aim to meet the needs of homeowners, while also protecting lenders. The most popular format of reverse mortgage is a Home Equity Conversion Mortgage (HECM). This type of mortgage is government-insured and provided by the US Department of Housing and Urban Development (HUD). A HECM is no different from a reverse mortgage, except that it has the government backing.
Before applying for a reverse mortgage, you have to know how much money you need; this is where a reverse calculator comes in handy.
You can set up your payment as monthly instalments, which is a way to avoid spending too much too soon. Other options include creating a line of credit, or receiving the fund as a lump sum.
Understanding the borrowing caps on reverse mortgages
In recent years, there have been more regulations in the mortgage borrowing agreement between lenders and borrowers. These have aimed to avoid unfeasible loan agreements taking place.
Currently, you can only borrow a percentage of your home’s equity from institutional lenders, such as Wells Fargo, or government agencies, like HUD. Your lender will evaluate your eligibility and the amount you can borrow, using a reverse calculator.
Receiving your reverse mortgage funds
Before you can qualify for a reverse mortgage, your lender will have to factor in many conditions.
To begin with, you have to be age 62 years or older. Additionally, your home must be your primary and permanent residence. You cannot be away from the property for more than six months, especially for non-medical reasons. Your home value should also exceed the amount you intend to borrow.
Another area your lender will consider is your credit score and financial worthiness to meet the property tax, home maintenance cost, and insurance.
As with any financial planning, when debating whether a reverse mortgage is right for you, make sure you’ve got your facts straight. You need to understand the value of the loan, the fees and interest rates involved, and the legal obligations you will be agreeing to, before you make your final decision.