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How to Tell If A Reverse Mortgage is Right for You

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A reverse mortgage is a loan that leverages the equity in your home.  Unlike a traditional forward mortgage where the borrower makes payments to the bank, with a reverse mortgage the borrower receives payments from the bank.  These payments can come as a lump sum, fixed payments over time, a line of credit, or a combination of those options.

If you’ve been reading about a reverse mortgage and wondering if it’s the right choice for you, here are some tips that may help with your decision.

You don’t plan to move again

With a reverse mortgage, you’ll keep ownership of your home and can live there (as your primary residence) for as long as you want.  A reverse mortgage becomes due and payable when the last remaining spouse either moves or passes away.  If you (and your spouse) don’t have any plans to move, a reverse mortgage may be a good fit.  

You want to move now

While it’s not recommended to get a reverse mortgage if you’re considering moving in the next 5-7 years, for those that are ready to move right now, there is a way to get a reverse mortgage on a home purchase.  It’s called a Home Equity Loan (HECM) for Purchase.  This is a valuable tool for those interested in moving and a reverse mortgage because it basically combines two transactions into one.  In the long run this can save you money on closing costs compared to purchasing a home and then separately getting a reverse mortgage down the line.

You just finished paying off a traditional ‘forward’ mortgage

A reverse mortgage must take the first-lien position when it comes to home loans.  This means that if you have a traditional ‘forward’ mortgage, you’d have to use some of the proceeds from a reverse mortgage to pay it off.  However, if you have recently paid off your forward mortgage, this would allow you to tap into even more of your home’s equity.  This can also result in a pretty big financial swing because in this situation a borrower went from paying the bank to receiving money from the bank.  

You’d like to make some home renovations but don’t want a HELOC

A reverse mortgage has some benefits compared to a home equity line of credit or HELOC.  First, there isn’t a strict timetable to repay the loan.  The second is that borrowers have much more freedom to spend the money with a reverse mortgage compared to a HELOC.  HELOC’s have rules about how the money from that loan can be spent.  A reverse mortgage has no restrictions on how the money can be spent.  It’s completely up to you!

You are planning to retire (or already retired)

It’s becoming more and more common to use a reverse mortgage as part of a diverse retirement financial plan.  Opening a line of credit with a reverse mortgage is one way to help push back the timeline on when you apply for Social Security benefits or begin drawing from retirement accounts.  Additionally, any amount of a line of credit that is not used will accrue at the current rate of interest plus 0.5% each year.  

While a reverse mortgage might not be the right choice for everyone, I hope these tips have helped you if you’re considering applying for a reverse mortgage.  Of course this won’t cover every scenario or situation, so if you have any additional questions, please don’t hesitate to contact the team at Equity Access Group.  

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