What Is a Reverse Mortgage?
As a senior, your most significant asset may be your home. If money is tight in retirement, you may be interested in getting a reverse mortgage. Here, we’ll discuss everything you need to know about reverse mortgages so you can make the best decision. What is a reverse mortgage? With a traditional mortgage, you take out a loan to finance a home and pay your lender back over time by making a monthly mortgage payment. A reverse mortgage works the opposite way — instead of making a monthly payment, you receive payments based on your home equity. This option is only available to older homeowners who meet eligibility criteria, which we’ll discuss below. You might also hear a reverse mortgage referred to as a home equity conversion mortgage, or HECM. How a reverse mortgage works With a reverse mortgage, you enter into an agreement where a lender pays you based on your equity in your home. Your lender doesn’t take ownership of your home, and you’re still required to cover the costs associated with it, like property taxes, homeowners insurance, and other maintenance costs or expenses. You can use the money from a reverse mortgage for any purpose — it doesn’t have to relate to your home. As a borrower, you have a few options when it comes to receiving your reverse mortgage proceeds: You’ll need to consider your specific needs when determining which option is best for you. Who qualifies for a reverse mortgage? There are certain criteria you’ll need to meet to qualify for a reverse mortgage, according to Steve Irwin, President of the National Reverse Mortgage Lenders Association (NRMLA): How much money can you get from a reverse mortgage? The amount of money you can get from a reverse mortgage loan depends on your age and the value of your home, as well as the current interest rate and the type of reverse mortgage you get. However, you shouldn’t expect to get the cash equivalent of the full value of your home. Rather, you’ll get just a portion of it. How much does a reverse mortgage cost? Just as there are closing costs associated with a regular mortgage, so too will you pay a number of fees when you enter into a reverse mortgage agreement. First, there’s a loan origination fee, which is either $2,500 or 2% of the first $200,000 of your home’s value — whichever is higher. From there, you’ll pay 1% for any amount of home value over $200,000. The maximum fee you’ll pay is $6,000. You’ll also need to pay for an appraisal and a compulsory housing counseling session. Plus, you should factor in mortgage insurance premiums — specifically, 2% at closing plus an annual fee equal to 0.5% of your loan balance. You may also be on the hook for monthly loan servicing fees that top out at $30 for fixed-rate loans and $35 for adjustable-rate loans. And there may be some additional third-party fees you’re charged at your lender’s discretion. Types of reverse mortgages There are different reverse mortgage types you might choose from: Pros and cons of a reverse mortgage A reverse mortgage is an excellent idea for some people — but not everyone. Here are the pros and cons of getting a reverse mortgage. Pros There are some advantages to a reverse mortgage: Cons On the other hand, reverse mortgages have their drawbacks. Avoiding reverse mortgage scams The reverse mortgage industry has long been blasted for its predatory practices. In fact, low-income areas are often targeted in an effort to get desperate homeowners to sign up. To avoid falling victim to a scam, you’re better off reaching out to lenders about a reverse mortgage rather than responding to unsolicited offers. You should also avoid signing any contracts or documents you don’t understand. If you have questions about the process, reach out to the Department of Housing and Urban Development at 1-800-347-3735. Is a reverse mortgage a good idea? It can be. With a reverse mortgage, you get access to income without having to sell your home and move. If you’re a senior homeowner with a lot of equity in your home, it could be an easy way to borrow. Just be aware of the drawbacks before moving forward. You may decide that you’re better off with a home equity loan or line of credit than a reverse mortgage. Or, you may decide that the cost of owning your existing home is too high, even with those reverse mortgage payments. There’s no right or wrong answer, so ultimately, it will boil down to your financial needs and what you’re comfortable with. Reverse mortgage resources from NRMLA The NRMLA offers additional information and resources at ReverseMortgage.org, including: By: Maurie Backman
Should You Look Into a Reverse Mortgage if You Need Funds for Retirement?
A lot of people look forward to someday stepping away from the hassles of the working world and getting to retire. However, being able to actually end your career relies upon having the money to cover your expenses in the absence of a job. AARP notes that you’ll need to replace about 80% of your pre-retirement income in order to live comfortably, and depending on your hopes and dreams for your retirement, you might want the flexibility to spend more money on travel and crossing items off your bucket list. And this is where some people run into trouble. If you haven’t been able to sock money away in a brokerage account to invest and grow it over your career, you might be lacking the savings to comfortably retire. Social Security payments will not match your old salary, and if you’re a long way off from retiring, how much they cover could change over time. For some people, a reverse mortgage looks like an attractive option. But what is a reverse mortgage, and are they worth considering? What is a reverse mortgage? You’re probably familiar with the concept of a mortgage loan. You stretch out the cost of buying a home over many years (15- and 30-year mortgage terms are common) in exchange for being charged interest on the loan by your mortgage lender. As you make your payments, you build up more and more home equity, until eventually, you’ve paid the loan off entirely and the home is yours outright. Along the way, you can also borrow against your home equity in the form of additional mortgages, home equity loans, and home equity lines of credit. A reverse mortgage is another way of borrowing against your home equity, but the loan is repaid when you no longer live in the home. Interest and fees are added over time to the amount you borrow, and eventually, you’ll have to pay the money back (along with these extra costs) by selling the home (or if you’ve passed on, your heirs will handle this). You can receive the money as a lump sum, in monthly installments, or as a line of credit you can draw from as needed. The most common type is called a HECM (or home equity conversion mortgage), and you must be 62 or older to qualify. There are other conditions to meet — the home must be your primary residence, you must keep up with maintenance and property taxes, and you must not have any outstanding federal debt, like unpaid income taxes. Is it a good idea to do this? Like so many aspects of personal finance, deciding whether to get a reverse mortgage to help you pay for retirement is just that: personal. So, I can’t answer this question for you! But here’s a look at the upsides and downsides of taking out a reverse mortgage. Pros If you’ve spent years building home equity, getting to access it to cover your living costs in retirement can certainly be a good thing. And you don’t even have to move out, you can remain in the home you love, and it’ll stay in your name. The payments you receive from your reverse mortgage aren’t taxable, so that can improve your bottom line at a time of life when money can be tight. And reverse mortgages are a type of non-recourse loan, which means they are backed by the value of the home itself, rather than any other assets, so the amount due can never be more than your home is worth. Cons A reverse mortgage is not free, and there’s no guarantee that you’ll qualify. You’ll have to meet the conditions noted above as well as others (for example, if you own a co-op, your home might not be eligible). And you’ll have to pay closing costs, just like with a traditional mortgage. Those fees will eat into the money you’d get from your home equity. And eventually, your reverse mortgage must be paid off. Perhaps it’s your intention to leave the home to your heirs when you die and have them handle selling it to pay off the loan (or paying it off otherwise). If not, it’ll be on you to sell your home and move. And if you pass away before your spouse, they may or may not be able to remain in the home. If things are looking a little tight in your retirement budget, and you have a lot of home equity, a reverse mortgage could be just the ticket for you. But consider the pros and cons and speak with a HUD counselor if you’re intending to go with a HECM (which is backed by HUD). You deserve the most stress-free retirement you can get, and this includes finding ways to cover your costs. By: Ashley Maready
What to Do When Social Security Is Not Enough to Live On
What to Do When Social Security Is Not Enough to Live On Social Security provides a crucial source of income for millions of Americans during their retirement years. However, for many individuals, especially those with limited savings or high medical expenses, relying solely on Social Security benefits may not be enough to cover their basic needs. If you find yourself in this situation, here are some steps you can take to improve your financial situation and ensure a more comfortable retirement. 1. Assess your expenses: Start by analyzing your monthly expenses and identify areas where you can cut back. Creating a budget can help you prioritize your needs and make necessary adjustments. 2. Explore part-time work: Consider taking up part-time employment to supplement your Social Security income. This can provide additional income and keep you engaged in a meaningful activity. 3. Maximize other income sources: Look into other potential sources of income, such as pensions, investments, or rental properties. Diversifying your income streams can help mitigate the impact of an inadequate Social Security benefit. 4. Downsize your living arrangements: If housing costs are a significant portion of your expenses, downsizing to a smaller, more affordable home can help reduce your monthly expenses and free up funds for other necessities. 5. Utilize government assistance programs: Investigate whether you qualify for any government assistance programs, such as Medicaid or Supplemental Nutrition Assistance Program (SNAP). These programs can provide additional support for healthcare and food expenses. 6. Cut unnecessary expenses: Evaluate your discretionary spending and eliminate any unnecessary expenses. This might include cable TV subscriptions, dining out, or non-essential subscriptions. 7. Consider relocating: Moving to a more affordable area can significantly reduce your overall cost of living. Research different regions to find places with lower housing costs, taxes, and healthcare expenses. 8. Access home equity: If you own a home, consider exploring options to tap into your home equity. This could involve downsizing, taking out a reverse mortgage, or renting out a portion of your property. 9. Seek financial advice: Consult with a financial advisor who specializes in retirement planning to help you navigate your financial situation. They can provide guidance tailored to your specific circumstances and help you make informed decisions. 10. Explore part-time entrepreneurship: If you have a skill or passion, consider turning it into a small business or offering freelance services. This can not only supplement your income but also provide a sense of fulfillment. 11. Evaluate your healthcare costs: Medical expenses can be a significant burden for retirees. Research different healthcare insurance options and ensure you are taking advantage of all available benefits, such as Medicare or Medicaid. 12. Take advantage of senior discounts: Many businesses offer discounts for seniors, ranging from restaurants to travel. Take advantage of these discounts to stretch your dollars further. 13. Join a community organization: Engaging with local community organizations can provide access to resources and support networks. These organizations often offer services and programs specifically designed for seniors. 14. Prioritize self-care: Taking care of your physical and mental well-being is crucial during this phase of life. Focus on maintaining a healthy lifestyle, managing stress, and seeking support when needed. Common Questions: 1. Can I work while receiving Social Security benefits?Yes, you can work while receiving Social Security benefits. However, if you haven’t reached your full retirement age, there are limits on how much you can earn before your benefits are reduced. Once you reach full retirement age, you can work and earn as much as you want without any reduction in your benefits. 2. Can I receive other benefits while receiving Social Security?Yes, you may be eligible for other benefits such as Medicaid, SNAP, or low-income housing assistance. Contact your local social services agency to determine your eligibility for additional support. 3. What is a reverse mortgage, and how does it work?A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into cash. This loan does not require monthly mortgage payments and is repaid when the homeowner sells the property or passes away. 4. How can I find affordable healthcare insurance options?Visit the official Medicare website (medicare.gov) to learn about available healthcare insurance options for seniors. Additionally, your state’s health insurance marketplace can provide information on subsidized plans based on your income. 5. Are there any resources available for job placement or career change assistance?Yes, many organizations provide job placement and career change assistance specifically targeted at seniors. One such program is the Senior Community Service Employment Program (SCSEP) funded through the U.S. Department of Labor. 6. Can I start a small business while receiving Social Security benefits?Yes, you can start a small business while receiving Social Security benefits. However, you must report your income accurately and ensure it does not exceed the allowable earnings limit. 7. How can I find affordable housing options?Contact your local housing authority or nonprofit organizations specializing in affordable housing to explore available options. Additionally, websites like housingmaps.com can help you locate affordable rentals in your area. 8. Are there any tax breaks or credits available for seniors?Yes, seniors may qualify for various tax breaks and credits. Consult with a tax professional or use tax software to ensure you are taking advantage of all available deductions and credits. 9. Can I receive Social Security benefits from a deceased spouse?Yes, as a surviving spouse, you may be eligible to receive survivor benefits based on your deceased spouse’s work record. Contact the Social Security Administration for more information. 10. Can I receive Social Security benefits while living abroad?In most cases, yes. However, there are specific rules and restrictions for receiving Social Security benefits while living abroad. It is advisable to contact the Social Security Administration to understand the implications and requirements. 11. Are there any educational opportunities or scholarships for seniors?Yes, many colleges and universities offer educational opportunities and scholarships specifically for seniors. Contact local educational institutions to inquire about available programs. 12. Can I receive Social Security benefits if I am