As we get older, passive income becomes more important (unless we want to work until the day we die). If they have taken the necessary measurements to ensure a comfortable retirement financially, then they are in the minority. The vast majority of people who are at retirement age underestimated how much they would need to retire and are forced to find other sources of income.
Many who should be able to retire are forced to go back into the workforce. They start a second career or take an entry level job just to pay the bills. Social security is not usually enough to live on and other measures are necessary. For those that find themselves in this predicament, a reverse mortgage might be something to consider. Why would someone considering retirment consider something like a reverse mortgage – which will actually put them into more debt? Let’s take a closer look at reverse mortgages.
In essence, a reverse mortgage is the opposite of a traditional home loan. In most cases, when you purchase a home, you borrow money for the majority of the purchase. By paying down the principal over the years, you’ll eventually own it free and clear. The great thing about a reverse mortgage is that the lender gives you monthly payments, and you’re not expected to pay it back until the end of the agreed upon term – which isn’t until you sell the home, or die.
The cool thing about a reverse mortgage is that you won’t run the risk of being foreclosed on even if the home value is reached. The remaining balance of the loan cannot exceed the home value. You don’t have to pay anything back until you either sell the home, or die. The lender is repaid via either life insurance, the sale of the home itself, or both.
A reverse mortgage is only available for people older than 62 and only for those who have a good deal of equity in the house. They will need to have the house paid off or be very close to it. You don’t need income to qualify for a reverse mortgage. As you won’t be repaying it with payments, the bank is not concerned on whether you can pay the mortgage back. The house acts as security against the amount they loan you. They’re also insured by FHA.
The largest drawback to a reverse mortgage is that you can’t pass on a home that you own free & clear to your heirs, but as they say – “you can’t put a trailer hitch on your coffin anyway”. This may or may not be important to those involved, but it should be a consideration.
A reverse mortgage is a great tool to use under the right circumstances. Be sure to discuss this with those who are closest to you. It never hurts to have a second opinion when it comes to matters like these. Check with your mortgage broker and play with the numbers. Just make sure to crunch the numbers, and run them by a loved one and financial advisor before making any final decisions.
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