You may have heard the term “reverse mortgage” and thought, “A reverse mortgage? What is that?”
The truth is, most people do not know what a reverse mortgage is, how it works, or what the benefits of having one are. At Putnam Bank, we believe the more you know about finances, the better financial decisions you will make. We would like to demystify reverse mortgages so you can have a better understanding of how they work, who is eligible for them, and the possible risks of using them.
What are Reverse Mortgages?
In the simplest terms, a reverse mortgage is a cash supplement you can use to boost your income in retirement.
How do Reverse Mortgages Work?
In a traditional mortgage, you pay your mortgage lender. In a reverse mortgage, you receive payments from your lender as long as you stay in your home. A reverse mortgage is repaid upon the death of the last borrower, if the home is sold or if the home is no longer your primary residence.
What are the Qualifications for a Reverse Mortgage?
In order to be eligible for a reverse mortgage, you must be 62 years or older and own your home free of debt or have a small remaining balance on your mortgage. Your home must be your primary residence, meaning you live there for over 50 percent of the year. You must also have homeowners insurance.
What are the Benefits of Reverse Mortgages?
There are numerous advantages to reverse mortgages:
- Proceeds are tax-free
- No monthly mortgage payments are required
- You can use the cash any way you choose
- You can continue to own your home
- There are no income qualifications
Are there Risks Associated with Reverse Mortgages?
Just like any loan program, there are risks involved with taking out a reverse mortgage. While new rules have been enacted to cut down on the possibility of borrowers losing their homes, there are a few ways it can still happen:
- Overspending- whether you receive your reverse mortgage as a lump sum or in monthly payments, you have to be smart with it. You are still responsible for paying the property taxes, homeowners insurance and other costs related to your home, so going on a spending spree with your additional funds isn’t recommended.
- Only listing one owner as the borrower- if both spouses are listed on the deed to the home, but only one signs as a borrower on the reverse mortgage, a lender can demand the loan be paid off when the borrower dies.
- Moving to assisted living- the same scenario is true if the sole borrower is moved to an assisted living or long term care facility. As the home is no longer their primary residence, the loan must be repaid.
- Life expectancy- payouts from reverse mortgages are based on age, meaning many couples put the oldest spouse as the sole borrower. While the payout may be higher, so is the likelihood of that person dying or needing to move into an assisted living home. If that happens, the loan must be repaid.
All of these scenarios can result in the loss of a home due to foreclosure, so it is important to think of all the possibilities before signing on the dotted line.
It is also important to work with a reputable lender when it comes to reverse mortgages, as there are plenty of disreputable lenders out there. When you inquire about a reverse mortgage at Putnam Bank, we get to know you and your financial situation to determine if a reverse mortgage is the right option for you.
If you would like to know more about reverse mortgages or are leaning toward that as an option to supplement your retirement, we encourage you to get in touch with us to see how we can help. We hope to hear from you soon!
Putnam Bank, member FDIC and Equal Housing Lender