Reverse mortgages are talked about a lot these days, but are sometimes not that well understood. Basically, a reverse mortgage is a type of mortgage loan secured against a residential property that can provide additional income for retirees, doing so by giving them access to the unencumbered value of their properties. But that doesn’t really tell you very much, especially if you’re trying to decide whether a reverse mortgage is a good idea for you. So let’s dig in, then, and see exactly what a reverse mortgage is and how it works in order to arrive at some solid advice for Kauai homeowners.
What Is a Reverse Mortgage?
“A reverse mortgage is a type of loan that allows homeowners ages 62 and older, typically who’ve paid off their mortgage, to borrow part of their home’s equity as tax-free income. Unlike a regular mortgage in which the homeowner makes payments to the lender, with a reverse mortgage, the lender pays the homeowner.”
The advantages of reverse mortgages are that Kauai homeowners who opt for one won’t have to make any monthly payments and they won’t have to sell their home – that is, they can keep living in the home. But the loan has to be repaid when one of three conditions obtains: 1) the borrower dies, 2) the borrower moves out of the home permanently, or 3) the borrower sells the home.
As good as a reverse mortgage sounds – the most popular type of which is the federally backed Home Equity Conversion Mortgage (HCEM) – “qualified homeowners may not be able to borrow the entire value of their home even if the mortgage is paid off. The amount a homeowner can borrow, known as the principal limit, varies based on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, the HECM mortgage limit ($822,375 in 2021) and the home’s value.” Typically, borrowers receive a higher principal limit “the older they are, the more the property is worth, and the lower the interest rate.”
Granted, all this isn’t that easy to get a handle on, so your best bet is to consult a Kauai agent to find out more. Just call 808-634-4518.
What Are the Pros and Cons of Reverse Mortgages?
Although borrowing against home equity in the form of a reverse mortgage can provide the cash you need for, say, living expenses, the various fees involved can up to a hefty amount. So there are, then, both pros and cons to reverse mortgages . . .
- You won’t have to make monthly payments on the loan balance.
- “Proceeds can be used for living and healthcare expenses, debt repayment, and other bills.”
- “Funds can help borrowers enjoy their retirement.”
- “Non-borrowing spouses not listed on the mortgage can remain in the home after the borrower dies.”
- “Borrowers facing foreclosure can use a reverse mortgage to pay off the existing mortgage, potentially stopping the foreclosure.”
- You have to maintain the house and keep up with property taxes and homeowners insurance.
- You are forced “to borrow against the equity in your home, which could be a key source of retirement funds.”
- Fees and various other closing costs can be pretty high and so will eat into the amount of available cash.
When Is a Reverse Mortgage a Good Idea?
So when is a reverse mortgage a good idea for you as a Kauai homeowner? Usually, it’s in one of the following cases, when . . .
Your Budget Needs a Break
“A reverse mortgage could be a good idea if you’re ‘house rich but cash poor’ – in other words, you own your home outright (or have paid off the bulk of your mortgage), but don’t have much cash flow If you have a significant amount of home equity, but not a whole lot of ready cash in your bank account, it could make sense to utilize your available resources by tapping into that equity.”
For those struggling to meet everyday and recurring monthly expenses, a reverse mortgage can be a boon. It could “help cover your everyday costs of living and give you some breathing room in your budget while allowing you to remain in your home.”
You Need to Make Repairs, But Don’t Have the Cash
Many retirees, after living in their homes for many years, reach a point where major home repairs are needed, but they just don’t have the needed cash on hand to fund those repairs. A reverse mortgage can help here.
In this scenario, without a reverse mortgage, you’d have to take out a Home Equity Line of Credit (HELOC) – but you may not qualify for one. “With the reverse mortgage credit line option, you won’t need to worry about typical qualification requirements. And you don’t have to worry about whether or not things will get too tight in your budget sending monthly payments to the bank since there are no monthly mortgage payments on the loan.”
You Need to Preserve Retirement Assets
A reverse mortgage can also be a viable financial tool to help you preserve your retirement assets. Here’s how this would work . . .
“Many portfolios have seen extreme declines in value and people are hesitant to lock in losses by selling out of those investments at a low point and thus depleting retirement assets.” You may find, then, that a “reverse mortgage gives you the opportunity to continue to live in your home without having to deplete your assets.”
You Want to Improve Your Quality of Life
Maybe you’re not struggling, but just want cash for some of those things that will make your quality of life better – such things as travel or gifts for grandchildren.
In this case, you could take out an HCEM line of credit to give you the quality of life funds you need while also preserving your “equity for family and heirs . . . [I]f you don’t have any children or heirs and don’t have a plan for your home for after you’ve passed, then a reverse mortgage could simply be used as a way to improve the quality of your life in your retirement years.”
Where Can You Get Some Assistance?
Whether or not to use a reverse mortgage is both a big and highly personal decision. You can, though, get some valuable assistance from a knowledgeable Kauai agent. If you’re considering a reverse mortgage, be sure to contact us today at 808-634-4518.