According to statistics from the Consumer Financial Protection Bureau, home equity represents a large portion of the average retiree’s net worth. Leveraging that home equity properly is an important part of an effective retirement plan. There is a variety of ways available to tap into one’s home equity, but one of the most popular ways is to take out a reverse mortgage. In April 2015, new rules were implemented to solve several previous issues often associated with reverse mortgages and make them more financially feasible for senior citizens.
Reverse mortgages are not the right financial strategy for everyone, so it important to know what you are getting into before you sign any paperwork. A reverse mortgage allows homeowners who are aged 62 and older to obtain a loan that taps into their home equity, giving them the ability to extract money from their home without losing their home in the process. The amount of money the homeowner gets from the loan is based on the value of the home, the ages of the homeowners, and the current interest rates.
There are a number of financial benefits associated with obtaining a reverse mortgage. As long as the homeowner continues to live in the home, the loan does not need to be repaid. The loans are non-recourse, so the bank extending the loan is only eligible to recoup the value of the loan, even if the home value exceeds the loan amount. On the other hand, the homeowner will not owe more than the value of the home if home values fall or the loan value exceeds the value of the home.
Properly utilized, a reverse mortgage can significantly improve a senior’s financial security during their retirement years. There are several different ways to obtain money from a reverse mortgage. Many people who take out these types of loans elect to go with a tenure option payment, which gives you a monthly payment for as long as you live in your home. You can also receive the money in a lump sum or have it issued as a standby line of credit, allowing you to borrow money when and how you choose. The choice made will depend on your financial situation, the amount of money needed, and how quickly you need to access the funds.
As part of the new rules, the government has added a financial assessment screening test to help determine whether potential borrowers can afford to enter into a reverse mortgage. Potential borrowers must demonstrate their ability to pay the additional costs of property taxes, fees, and insurance premiums using a calculation based on their current income and the amount of credit available to them. While this new requirement will disqualify some seniors that would have qualified before, the rules ensure that fewer seniors will find themselves in financial distress during their retirement years due to the taking out of a reverse mortgage.