Reverse Mortgages: Worried About Retirement Saving? Have You Considered Using Your Home Equity?
According to researchers, the next few decades will see millions of people relying on their savings for everyday expenses. The retirement income tools in the market are highly limited, and superannuation alone may not help you live comfortably during your retirement years. Let’s take a look at another income-generation tool that is picking up pace among retirees, reverse mortgages.
How does a reverse mortgage work
Reverse mortgages, as the name suggests, work in the exact opposite fashion as mortgages. In case of a mortgage, homeowners make mortgage payments to a lender on a regular basis, and the home equity strengthens as the debt decreases, as payments are made with time. In case of a reverse mortgage, the homeowner loses equity in the property with time, while the other party makes payments for the same. You have claims over the property and can live in it as long as you please and do not have to make payments during the life of the loan. You will have to repay the entire loan, along with the fee and interest, only when the property is sold, you move to an aged care or pass away. During the life of the loan, you can ask the creditor to pay you in a one-time lumpsum amount, line of credit, periodic income, or a mix of any of these choices. Know that opting for a one-time lumpsum payment on your reverse mortgage plan may affect your pension.
Should you consider a reverse mortgage plan?
Some retirees are not keen on the idea of reverse mortgage, as they think it’s just a scheme to sell off home equity in bouts, meaning they will be living off their kids’ inheritance. You should know that there are upper caps on how much you can borrow against your home equity in a reverse mortgage plan. Of course, the amount that you can borrow depends on the lender that you are partnering with and also your age. To give you an idea about the standard rates, you would be able to draw about 15 to 20 percent on your home equity if you were of 60 years of age. If you were 70, the cap would move up to about 25 to 30 percent. This means, at the end of the reverse mortgage plan, you still have some portion of the equity left for beneficiaries.
Now, you may ask if a reverse mortgage would actually translate to better turnout monetarily in the long haul, considering the fact that you will be paying the compounded interest as well. No doubt, the compounded interest will add up to the overall loan balance, but you also need to factor in the appreciated value of the property over time before doing the math. Of course, this is based on the assumption that the property value will increase over time, which would not be a wrong assumption to make given how the property market has been faring for the past few years.