How Does a Reverse Mortgage Work?

by Ashley Wirgau

If you are coming up on retirement, you’ve probably been digging in to your finances to determine how smoothly you can cruise off into those sunset years. If it’s starting to look like your mode of transport is less Porsche and more pedal bike, don’t lock yourself into a Schwinn just yet. There are lots of ways to finagle your finances, and if you’ve hit retirement age (specifically 62+), a reverse mortgage could be just the thing to upgrade you to the most comfortable ride of your life.

Tax Free Fun

Unlike a standard mortgage where a homeowner makes payments to a lender, a reverse mortgage (as the name implies) works in reverse. In this type of arrangement, the lender actually makes payments to the homeowner, allowing for extra income when the years of full-time employment have ended. And unlike all those 40-hour weeks with Uncle Sam claiming his cut, the funds received from a reverse mortgage are typically tax-free. The government does not include this money as reportable income, and instead, views these funds as a loan because that’s what it is. Just like a traditional mortgage, this loan uses the property as collateral, and the borrower is charged both interest and fees throughout the life of the loan. However, since the homeowner has already accrued significant equity in the property (at least 50%) or owns the property outright, the bank allows the homeowner to borrow against the house in order to receive various payment schedules including a lump sum, set monthly amounts, a flexible line of credit, and other options. And the best part? There are no loan payments!

It’s Still Your Home Sweet Home

One common misconception regarding reverse mortgages is how they affect homeownership. With this type of mortgage, the borrower holds the title to the property for as long as they live, providing the property remains under good repair, the insurance and property taxes are paid, and the home remains their permanent residency. Any interior decorating or upgrades the homeowner would like to make are still under their control, and additional residents are permitted at their discretion just as before. So long as the borrower holds up their end of the bargain, the bank holds up theirs.

Failure to maintain any of these standards, however, could result in the homeowner having to repay the loan (which is often rectified by selling the property). This may occur due to taxes which have gone into arrears or if a borrower has to move to a long-term care facility for a year or longer. Should any of these things happen, it is important to stay in contact with the lender in order to create the very best scenario for both parties and any involved heirs.

Better Budgeting

Retirement can bring added stress when it comes to number crunching and sticking to a budget. The resources coming in tend to be more limited than in younger years, and many seniors find themselves in a tricky predicament trying to cover their monthly expenses. A reverse mortgage can help ease this burden by providing stable, reliable income to help pay bills, buy groceries and, hopefully, find a little fun. Just how much fun can you afford? A reverse mortgage calculator provides a quick peek at upfront cash payouts and monthly income available depending on the age of the borrower, the value of the home, and a few additional details.

Peace of Mind

One of the greatest perks of the reverse mortgage is the general peace of mind it brings. Many retirees are unaware of the money waiting for them at the other end of homeownership. Having worked so hard to pay off their original mortgage, it might seem counterintuitive that one would then wish to dissolve the asset they finally own; however, for seniors facing strict financial times, the added cash flow a reverse mortgage makes available balances the eventual release of their home. Additionally, it should be noted that heirs are often given a considerable amount of time to decide how they would like to proceed with the reverse mortgage following the death of a loved one, allowing survivors time to pull together funds to pay off the loan and keep the house if they so choose.

For many, a reverse mortgage is uncharted territory, but that doesn’t necessarily mean the voyage isn’t worth it. This type of loan spells relief and a little more relaxation for a number of seniors looking to bulk up their income after formal employment has ceased. Ruoff is here to help start that journey and answer any additional questions surrounding how to turn that home sweet home into a happy ride through retirement.

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