Reverse Mortgages

If you’re nearing retirement, you’re likely starting to think about your savings and retirement plan and how you can ensure a financially secure retirement. With your peak income-earning years largely behind you, you’ll need to work with what you have in order to ensure a livable retirement income. That’s where a reverse mortgage may be a sensible option.

How does a reverse mortgage work, and how can it help you to have a more financially secure retirement? Here’s what you need to know.

A Reverse Mortgage Is Tax-Free And Saves Your Social Security Benefits

Social Security benefits offer a basic form of income for senior citizens, but if you tap into your Social Security too early in your retirement, you could use up your available benefits in a short span of time. Deferring Social Security until later on in your retirement means that you’ll get an extra 7 to 8 percent per year you defer, which is why you’ll want to save your Social Security for as long as possible. But in order to do that, you need another income source to live on.

A reverse mortgage is a tax-free income source that you can use to fund the early part of your retirement, allowing your Social Security benefits to mature. Best of all, a reverse mortgage frees up your budget so you can invest more of your funds and collect returns later.

You’ll Never Owe More Than Your Home’s Value – And There’s No Set Repayment Date

A lot of loans have high interest rates and fixed repayment periods. This means that if you use credit cards or take out a personal loan, for instance, you’ll be locked into a set repayment date or won’t have a high enough borrowing limit – or if you do have a high borrowing limit, you’ll find that interest charges quickly add up.

Reverse mortgages have no set repayment date, which means that you can use the money from a reverse mortgage as needed without having to worry about repayment. You’ll also never owe more on your reverse mortgage than what your home is worth, so you’ll never find yourself underwater.

A reverse mortgage is a great way to ensure that you have a safe, stable retirement – and it can add an extra layer of security on top of your social security benefits. Are you considering taking out a reverse mortgage on your home? A qualified mortgage advisor can help – contact a mortgage professional near you to learn more.

If you’re considering applying for a reverse mortgage, you’ll want to ensure you understand certain critical factors. One such factor is the principal limit. The principal limit will have a strong influence on your finances, which is why you’ll need to ensure you know – before applying for your reverse mortgage – what your principal limit is.

So how does a principal limit work, and how can you find out what yours is? Here’s what you need to know.

Principal Limit: The Maximum Amount You Can Borrow

Simply put, the principal limit is the maximum amount of money that you can borrow using a reverse mortgage. This maximum amount does not change if you pay off your reverse mortgage and then apply for a second one – rather, it’s a lifetime maximum that is calculated per-borrower. The principal limit is nationally legislated through the Federal Department of Housing and Urban Development.

Calculating Your Principal Limit Factor

Calculating your principal limit factor is fairly simple. The Department of Housing and Urban Development maintains a chart that shows you what your principal limit factor is. To look up your principal limit factor, all you need are your expected rate and the age of the youngest spouse in the home.

The principal limit factor is useful in determining what kind of a loan you can get. The size of the loan you can expect to receive is equal to your home’s value multiplied by the principal limit factor.

For example, a 72-year-old who owns a $300,000 home with a 10-year interest rate of 3% and a lender margin of 3% has a 6% “effective rate”. According to the table, a 72-year-old with a 6% effective rate will have a principal limit factor of 46.7%. That means the most this borrower can receive through a reverse mortgage is $140,100 – which is 46.7% of $300,000.

What Happens If You Reach The Principal Limit?

If you reach your principal limit, you will have exhausted all of the money available to you through a reverse mortgage – you will have used up all of your equity. A reverse mortgage is a non-recourse loan, which means your lender cannot pursue you or your heirs to recoup their money. In the event that you choose to sell the property, all of the proceeds will go to the reverse mortgage issuer – none of it goes to the homeowner.

A reverse mortgage can be an effective financial tool, but if you use up all of your equity, it may paint you into a financial corner. An experienced mortgage advisor can help you to determine if a reverse mortgage is an appropriate financing option for you. Contact your trusted mortgage professional today to learn more.

If you’ve studied the real estate market recently, you’ve probably heard about the reverse mortgage. This unique tool is a financial arrangement designed for senior citizens who have limited incomes and want to use the equity in their homes to meet their everyday expenses. And although it’s becoming increasingly popular, few homeowners truly understand it.

So how does a reverse mortgage work, and when is it appropriate for a homeowner to get one? Here’s what you need to know.

What is a Reverse Mortgage?

A reverse mortgage is a loan that uses your home equity as collateral – essentially, you borrow money against the value of your home. But unlike home equity loans, you don’t have to repay a reverse mortgage until you sell your home or are no longer able to meet the terms of the reverse mortgage. If you’ve paid off your home in full, a reverse mortgage can be a great source of income if you don’t have other income streams to rely on.

However, there are tight restrictions around who can quality for a reverse mortgage. To receive a reverse mortgage, you must be at least 62 years old and you must use the property in question as your primary residence. You also need to have equity in your home – you can’t owe more on the property than it’s worth.

The Benefits and Risks of This Arrangement

A reverse mortgage is a fast and easy way to access funds. The most popular kind – a Home Equity Conversion Mortgage – is a federally insured reverse mortgage that offers strong borrower protection. Most reverse mortgages don’t have any income requirements or monthly payments, and they can provide elderly seniors with a much-needed supplemental income.

Reverse mortgages can be risky. The processing fees can be high as 5% of your home’s value. If you spend the funds irresponsibly and miss property tax or homeowners insurance payments, your reverse mortgage may come due.

How to Make a Reverse Mortgage Work for You

The best way to use a reverse mortgage is to take it in the form of a variable-rate line of credit. And according to the AARP, longer loan terms are better – especially if you may need long-term care.

A reverse mortgage can be a great tool for meeting your expenses if you’re beyond your working years. But it also carries some risks, which is why you’ll want to make sure you have a thorough plan for how you’ll use the funds. Contact your trusted mortgage professional to learn more about reverse mortgages and if they will work for you.