The contrast between the busyness of your working life and the idyllic days of doing everything on your own terms in retirement can be massive. Once the phase of family responsibility, child-rearing, climbing the corporate ladder and seeking status passes, you should be left with a world in which you are free to relax and create a space in which you can peacefully exist without worry.
I think most of us dream of our retirement days, where we have a chance to enjoy our passions, engage in hobbies and perhaps, even travel the world but of course, one cannot consider retirement without addressing the elephant in the room – financial stress. How are you expected to exist, never mind build a lifestyle of your choosing, without a regular salary? Sadly for some people, it is a step too far and they'll have to work long into their seventies and maybe even eighties if they want to live comfortably.
However, if you are in the fortunate position of owning your home, the reverse mortgage (also known as equity release) might be a welcome ally in retirement. Let's investigate more about what it is -
Demystifying Reverse Mortgages
There is a big difference between a regular home loan
and a reverse mortgage. If you are bound to a regular loan, you will be under contractual pressure to repay your lender monthly, and this might be tough without a regular salary. Compared to this, a reverse home loan pays
you, for as long as the loan remains funded and valid. One of its chief
conditions is that you remain permanently resident in your home, and because of this, your risk of
being kicked out of your home due to non-payment is incredibly low. The
duration of a reverse home loan can also end up being much longer than the
standard five to ten-year period of a regular loan. In fact, as long as you
remain permanently resident in your home, the loan will remain valid and you can continue to enjoy your pay-out (be it a one-off lump sum, a line of credit or a monthly payment).
But before you commit, you should be aware of certain things. Other than remaining permanently resident in your home, there are some other conditions that you will have to abide by. Firstly, long periods of absence from your home are not allowed and therefore long vacations of more than a year are ruled out as an option. Secondly, if you decide to move, the loan will be immediately due and lastly, there are some costs associated with closing a reverse mortgage and thus they are not recommended for those who wish to sell-up and move within a few years.
The amount you can get will depend on a few factors - your age, your home value and the current interest rates. Generally, you can get a loan for 40 - 60% of your home value. Your funds can be used for virtually anything and as it is your money you're borrowing back it will not be taxable.
The Application Process
If you are over the
age of 62 and need a loan, the reverse mortgage can be a good route to
choose. But just because it is available, does not mean that you need it, so
be sure to do a comprehensive analysis of your needs before committing to any
sort of loan. Also, the Federal Housing Administration insist that all parties shave independent third-party counselling either by phone or in-person to ensure that all the implications of a reverse mortgage are understood.
As this is a government-insured loan, you will have to go through all the usual loan application procedures. Such as proving your identity, ownership of the property, other financial implications that may impact the loan and the appraised value of the home.
Initially, a reverse mortgage calculator will determine your creditworthiness, and once a loan offer is granted you can choose how much you wish to take. Just because there is $200,000 equity in your home, does not mean you have to take that full amount, you may just choose to take $50,000 to make your day-to-day life easier and keep the rest in equity for your heirs.
Repaying the Reverse Mortgage
The loan will be repayable once the last homeowner passes away, moves out of the home as their permanent residence or sells it. Heirs will have up to 12 months to sell the house and finalise the estate so the balance of the loan can be repaid.
Or at any time the loan-holder/s can choose to voluntarily pay off the loan. Or if you happen to come into some money you can choose to partially to fully repay the interest charges without any penalty.
I hope this article has given you an insight into how a reverse mortgage works and helped you to start thinking through if it might be suitable for you. Do remember to check out the pros and cons of reverse mortgages and listen well when you have your loan counselling, so you can make a well-informed decision that suits your family circumstances.
Wishing you a very happy retirement!
