With so many things to consider as your parents age, Finances may be the last thing you want to worry about when they retire retire.
Yet, as concerned family members, you may have fears of you or your parents being unable to afford basic expenses.
Even if you have those expenses covered, you may not know how you will afford it when an emergency pops up. That is why you may want to consider the pros and cons of a reverse mortgage.
A Reverse Mortgage at a Glance
“What is a reverse mortgage?” you may ask. The answer is it is a loan you take out on your home when you retire or when you are at least 62 years of age. It is not the same as a traditional home mortgage for several reasons. One is a reverse mortgage lender does not expect any portion of the money back anytime soon. This type of loan agreement is set up to help retirees like you borrow money without adding financial burdens.
Another difference is a reverse mortgage has no set payment period. A traditional loan may require full repayment in three to five years. It also requires you to make scheduled payments toward the loan balance. You don’t have to repay a reverse mortgage as long as you are the owner of your home and remain living in it.
The Reverse Mortgage Lender Selection Process
One concern you may have is how to pick a reverse mortgage lender. There are several choices. One is to apply for a home equity conversion mortgage (HECM), which is a reverse mortgage offered by the federal government.
You can also opt for obtaining a mortgage through a large banking institution. For example, Bank of America reverse mortgage contracts are said to be trusted because they come from a large bank known in many states.
A third option is to get a reverse mortgage locally through a smaller bank in your area. Make sure it is a bank you have conducted other business with or otherwise trust.
Establishing the Value of Your Reverse Mortgage
It takes some effort to establish the value of your reverse mortgage. Your lender must first assess your home. A reverse mortgage calculator tool is used to make that assessment. It factors in several issues, including the location, condition, size and age of your home. Government regulations about borrowing limits must also be considered.
Money Distribution to You from Your Reverse Mortgage Lender
Provided your home has enough value to borrow against when reverse mortgage calculator assessments are made, your next decision is determining money distribution. You have to choose when and how you want to receive the portion of home equity you are entitled to borrow.
You can create a credit line on your home to borrow exactly what you need and nothing more. You can also ask for one big payment for a specific purpose. However, it is more likely you are having difficulty paying for regular needs, such as monthly utilities or food. If that is the case, receiving monthly allotments may be the most helpful to you.
Limitations of Reverse Mortgage Agreements to Know
Reverse mortgage agreements have a few limitations you need to know about. For example, you cannot maintain a standard home loan and a reverse mortgage on the same property at the same time. If you already have a traditional loan, you must pay it right away using reverse mortgage funds.
Also, your reverse mortgage agreement is voided if you stop living in the residence or meeting the obligations of home ownership. If that happens, you have to repay the full balance of what you owe or the home is sold so the lender can recover at least a portion of that money.
Wrapping it up
So, is a reverse mortgage the right option for you or your parents?
A tough questions to answer, and more than likely, the answer is ‘it depends’. While there are certainly several benefits, there can also be costly ‘cons’ and limitations if not considered carefully.
Your best bet is to seek advice from a trusted family or succession planner, and come up with a custom solution that is that suits your family’s unique needs.