How Does a Reverse Mortgage Work?

Reverse mortgages are a great way for retirees to supplement their income using the equity in their home. The simplest way to define a reverse mortgage is to think of it as the opposite of a traditional home loan. When a homeowner executes a reverse mortgage, the bank will pay them for the equity in their, and recapture it later when the home is sold. The homeowner can choose to take the money in one of three ways:  either by a lump sum, a line of credit, or monthly payments. Most often, the homeowner chooses to receive monthly payments from the bank. This increases their monthly income, and can close the gap on any deficiencies in their budget.

Other Benefits of the Reverse Mortgage

In addition to being able to supplement your income while in retirement with the equity in your primary residence, there are also some further key benefits to you:

  • You will never owe more than your home is worth.
    In the event that property values decline and your balance is greater than the appraised value of the home, mortgage insurance will cover the gap. This is a great feature to provide stability for the borrower and their heirs.
  • In additional value will be paid to your beneficiaries.
    That’s right, after you pass on, and your heirs sell the home, just like a regular mortgage, if the sales price exceeds the loan amount, then they will get the additional money.
  • The income from the reverse mortgage does not count as taxable income.
    So as you supplement your income with this type of loan, you don’t have to worry about paying any additional taxes on the gain.
  • Income from a reverse mortgage will not count against any Social Security or Medicare benefits.
    Sometimes if you get a job during retirement, and you income exceeds a certain amount, you can lose some or all of your all of your Social Security and Medicare benefits. Not true in the case of the reverse mortgage. The proceeds do not count against any quotas that these programs may have.

Some Downsides to a Reverse Mortgage

The reverse mortgage is a loan, and does acquire interest. So be sure to get a Truth in Lending statement from the mortgage company or bank you are working with to be sure of exactly what will be owed at the end of the reverse mortgage, what your interest rates are, etc. The rates on these loans should be good, considering you have good credit, etc.

Another issue with the reverse mortgage is that you must own the home free and clear of any other liens. If you have an existing mortgage, that mortgage will have to be paid off upon closing the reverse mortgage.

Last, I just don’t like having debt. I currently have a regular mortgage on my house and would like to not have the payment. With a reverse mortgage, you don’t have to pay the money back until death, however I just would like to be completely free and clear of debt, period.

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