Published On: Fri, Jul 28th, 2017

Supplement Your Retirement Income with a Reverse Mortgage

Many people feel excited as they move closer toward retirement, thinking that they will be able to cut down on their monthly expenses. In reality, however, retirement may not be as budget-friendly as you initially thought. This is a function of having plenty of time in your hands, and the tendency is to find ways to make use of this time. Unfortunately, the ideas that pop up in your mind probably require money. If your retirement fund isn’t big enough, you may find yourself looking elsewhere for cash.

photo Alina Ku-Ku via Shutterstock

Surely, you wouldn’t want to take on part-time work once you’ve retired just to fund your day-to-day activities. Taking out a loan may also be out of the equation, considering that you will likely struggle with the monthly payments. Thankfully, there’s another way to supplement your retirement income without requiring you to shell out money month after month. It comes in the form of a reverse mortgage, an increasingly popular financing tool for seniors.

Also referred to as a home equity conversion mortgage, this type of mortgage allows you to turn your home equity into retirement income. You may qualify for the loan if you are 62 or older. If this is your first to hear about HECM, then you are not alone. Retirees haven’t considered using a reverse mortgage loan to help boost their retirement fund, primarily because of the high fees associated with it. Increased regulation, thankfully, has turned it into a viable option for cash-strapped seniors. The surge in a number of reverse mortgage lenders also has a profound effect on the loan’s affordability.

While it seems confusing, HECM is actually straightforward. As its name suggests, it’s a kind of mortgage that works in reverse. Instead of borrowing money and paying the loan with interest over time, you accumulate the loan and then pay back the lender when you move out of your home. One notable downside is that the interest accumulates as well, which means the money you need to pay grows over time.

It may sound scary to allow the loan to accumulate over the years, but the good news is that you will never have to pay more than the value of your home. This proves beneficial in case you get approved for a reverse mortgage and then home values go down. It also offers so much flexibility, as you can receive the loan money as a line of credit, lump sum, or annuity. You also wouldn’t have to worry about any restrictions in terms of how you use the funds. You can use the money to travel the world, pay for elderly care insurance, or just let it sit in case of emergencies.

Using HECM is also a crafty way of preserving wealth. Under the right circumstances, it’s recommended to take your loan as a home equity line of credit. This allows the line of credit to grow annually and preserve the value of your home even if the real estate market goes down.

Of course, this isn’t to say that a reverse mortgage works for everyone. The fees associated with HECM, despite decreasing over the years, can still be expensive. You may also want to look at alternatives if you don’t have plans of staying in your current home for the long term.

Author: Matthew Perry

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