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5 Key Advantages Of A Reverse Mortgage
The word “reverse mortgage” can be intimidating to some people because it is not a term that people are generally familiar with.
But if you take a little to time to understand it, you will realize that it comes with so many advantages that you cannot wait to get your hands on one… provided you are eligible for one…
Even so, it will be hard for these alternatives to be more beneficial.
Before you consider the advantages of a reverse mortgage, you must take note that there are 3 main disadvantages.
The first is that if you are living in a high valued house, you might have problems getting approval.
This is because there is a specific target profile of home owners that these financial facilities cater to.
The other disadvantage is that there is significant closing cost.
Thirdly, there is always a chance that a borrower would outlive the term of the loan.
Now lets look at the advantages.
1) Still own the house
You can continue to live in your house for as long as you like.
Nobody will come and pester you on payments and threaten you with foreclosure.
Even if for some strange unique reason that puts you into financial trouble, the lender will likely step in to help you as they now have a stake in the house.
Your well-being becomes their well-being as well.
On top of that, banks wouldn’t want to face a public relations nightmare where they are seen as bullying the elderly.
2) Recurring passive “income”
You will be able to live off extra cash generated from such a contract.
So if you are currently living on a fixed income that can barely afford you some luxuries at the grocery store, a reverse mortgage can help alleviate your lifestyle into one that is just that little better.
It gives you cash when you need it.
Payments work just like an annuity insurance plan. The main difference is that the money comes from the equity that has been built up in the house over the years.
This is probably why such loans are often called reverse annuity mortgages.
Your legacy will be intact and your children or descendants will still be able to inherit leftover balances.
There is one thing that comes into our mind every once in a while. It is whether our children will reap the rewards from our years of hard work accumulating wealth.
When we pass on, our children can pay off outstanding loan themselves and takeover ownership of the house.
Or they can let the lender sell the house and get access to the remaining cash after paying off lender.
So there will not be any extra burden on them.
4) Less predatory terms
Reverse mortgages are anti-predatory by nature. So much so that there are standard rates that you will enjoy.
They are after all, meant to target retirees so that they can have an easier life.
This helps as mortgage brokers and loan officers will not be trying to pressure you into taking bigger loans or higher interest rates.
5) Repayment peace of mind
If you have ever dreamed of a casual retirement lifestyle having no headaches about cash flow, this is a good way to go.
It is time to reap the rewards of your hard work.
You do not have to keep all your sweat equity in the house, a loan structured this way can provide you a good lifestyle while remaining in the house.
You also do not have to worry about repayment as that will be settled when you move on.
Why reverse mortgages are still not main stream?
So why do home owners still stay away from reverse mortgages since it has so many benefits?
- Firstly, there is still a lack of publicity to make these forms of credit facility known.
- It can be difficult to understand and comprehend for those who are not financially savvy.
- A lot of jargon is used to explain the different terms in such products.
- Fraud has always been in existence with home loans. So when someone has never heard of a new product, they might be very wary to go ahead with it.
When we consider that lenders will have thin margin with these types of loans, it is understandable that they don’t place a huge marketing budget to advertise them to consumers.
To round it up, this is a type of loan that will be most suitable for older home owners.
It is structured this way to provide them maximum financial benefit while not having the burden of monthly financial liabilities.
A reverse mortgage can be a great tool for older borrowers
A reverse mortgage, also referred to as a Home Equity Conversion Loan, is a financial instrument that allows seniors to access the equity in their home without income or credit qualifications. – Wikipedia
Reversed mortgage can more than make a little sense especially for those who are living on a fixed income.
In fact, it is so beneficial that many professional financial planners include it in the planning for their clients.
And it seems that home owners in the United States are not oblivious to it’s advantages as well.
This can be observed as there is a growing number of these types of mortgages undertaken year-on-year.
As the older generation are retiring or already retired, they live on a fixed income while their expenses are variable. And variable usually means a tendency to go up rather than down due to inflation.
And when their expenses starts to exceed their fixed income, the nest egg which is their home is the obvious place to look into for additional cash.
Home equity plays have been around for years, but reverse mortgages have not been popular until recent years.
To release the equity trapped in one’s home, the most common way is to sell it or get it refinanced.
To a retiree, either of these 2 options are not feasible.
Firstly, they need the house to live in. This strikes out the first option. Secondly, retirees are already living on a fixed income, why would they want to add on to their financial burden by adding a home loan expense into their cash flow.
This is where the features of a reverse mortgage start to connect all the dots. It allows the property owner to consume it’s home equity while keeping the house.
The reason why many older home owners do not go this route is either because they are unaware of it’s existence, or because their advisors are not proficient enough to advise them accordingly.
Usually uninformed home owners end up with a cash out refinance instead, which compounds their monthly expenses.
A tenure reverse mortgage comes with a fixed cash sum for a specified period of time. Or if required, mix it up with a lump sum or credit line.
These terms are flexible and a lender should be able to explain all your options to you.
So alleviate your cash flow problems with suitable cash or credit facilities while keeping your house to live in. It’s like a double boost.
Unlike predatory loans, reverse mortgages have a lot of rules and requirements that lenders have to adhere to.
Lenders will have to list down all expenses over the life of the loan so that you know exactly what are your costs over the term.
In addition to that , there is a limit on how much a lender can profit from you.
Best of all, there is a standard rate for these types of loans.
Are you tempted yet?
Take note that when the borrower passes away, the loan becomes payable. This is when your children or the people you appoint have to take measures to repay the amount due themselves or sell off your property to repay it.
Lenders will be able to take over the premises if there is no response to their repayment notices.
Now can you see why such a facility is most suitable for retirees with tight cash flow?