Reverse mortgages have become an increasingly important financial tool for people 62 and older who want to remain in their home and fund their retirement. And, with 78 million Baby Boomers approaching retirement, interest is expected to grow.
Despite this, many Americans are still unclear about how reverse mortgages work and when they may be appropriate. "A reverse mortgage is a loan secured by the value of a house, where no repayment of the loan is required until the borrowers permanently vacate the home," explained Peter Bell, president of the non-profit National Reverse Mortgage Lenders Association. "Although historically, this has been of particular interest to those with limited sources of liquid income, these days, there are many new retirees considering a reverse mortgage as an option after looking at all the other assets they've accumulated. This tool can help a person avoid taking Social Security too early or defer taxable withdrawals from IRA or 401(k) balances."
"Reverse mortgages enable many Americans to 'age in place' comfortably in retirement," said Donna DeMaio, president of MetLife Bank. "For many people, reverse mortgages are a good way to continue to stay where they are, remain independent, and live a more fulfilling life. Modern retirement income planning is about making the most of what you have, and reverse mortgages can be an important part of that plan."
There are several advantages to securing a reverse mortgage. Borrowers can continue to live in the home as long as they want, and the amount owed to the bank by the borrowers when the property is sold will not exceed the lesser of the mortgage or its sale value. Interest and charges, including origination and closing costs, accumulate until that time, with no periodic payment required. As with traditional mortgages, the bank does not own the client's home: borrowers retain ownership, and are responsible for paying property taxes and homeowner's insurance, as well as property repairs. So, when does a reverse mortgage make sense? Consider the following questions:
-- Do you qualify? Are you and any co-owner of the home at least 62 years old? Do you own your home and live in it as your primary residence? These qualifications need to be met before a reverse mortgage can even be considered.
-- Do you have equity built up in your home? For individuals and families who have diligently paid down mortgages for years, and have worked hard to maintain and improve their property, a reverse mortgage is a way to realize a portion of that financial value.
-- Are you satisfied with your current level of retirement income? Many individuals, in retirement or approaching retirement, are finding that traditional retirement tools, including IRAs, pensions, and 401(k)s, do not provide enough income to comfortably fund current or anticipated living and healthcare expenses. A reverse mortgage can provide greater peace of mind and improve one's quality of life. Taking reverse mortgage proceeds in regular monthly payments (the "tenure" option) that last as long as one lives in the property is a way to boost cash flow each month, and usually will produce a lower loan balance than a lump sum distribution when the time comes to pay off the loan.
-- Do you want to retire your existing mortgage? Many retirees are still paying a conventional mortgage, and as a result, have less disposable income than they would like to have at the end of the month. Depending upon the amount, a reverse mortgage can pay off an existing mortgage, freeing up money for other things. To gain a better understanding of where you stand, the AARP has a free reverse mortgage calculator that's available at www.rmaarp.com.
-- Is a reverse mortgage a better option than a home equity loan? For many retirees, the income and credit requirements on a home equity loan may prove an obstacle to accessing that particular financial tool. A reverse mortgage doesn't have these requirements.
-- Do you intend to pass your home on to your children or other loved ones? With a reverse mortgage loan, the outstanding balance needs to be repaid when the title changes hands. If one's heirs wish to keep the home, they may be able to refinance the loan at that time, but it may be necessary to sell the property to repay the loan. Take the time to openly discuss this question with loved ones as an important first step when considering a reverse mortgage. Many families find that their children would prefer to see their parents experience a more comfortable retirement, rather than making the priority obtaining the family home, 'free and clear.'
SOURCE: MetLife, Inc.
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