One of the most beautiful and breathtaking plays in basketball is the reverse layup. As a small guard comes flying down the baseline toward the rim, he finds himself soon seemingly out of space and surrounded by 7-foot behemoths that are ready to swat away anything he throws up. Just when all hope seems lost, he flies to the other side of the rim and throws the ball off the square over his shoulder for acrobatic two points, invoking plenty of ‘oohs’ and ‘ahhs’ from the crowd.
Similarly, many working adults find themselves flying down toward the end of their career, wondering where the time to make better plans for retirement went. They’re surrounded by 7-foot behemoths of unexpected bills, pension cuts, healthcare fees, and smaller savings accounts than they initially anticipated. Just like a reverse layup can be an extremely useful tool for any basketball player to have, the reverse mortgage is a tool that any homeowner approaching retirement should know about.
Related: Is Buying a House Becoming Obsolete?
So what exactly is a reverse mortgage?
A reverse mortgage is basically what it sounds like: a mortgage in reverse. In such a situation, rather than making regular payments to slowly build equity in a home as in a traditional mortgage, with a reverse mortgage you regularly receive payments while losing equity in your home; alternatively, you can choose to receive one lump sum payment. The former can be a great source of stable income for retirees whose retirement plans won’t provide them with the regular stream of money that they desire, and the latter can provide a large amount of money that can be used for other opportunities, such as real estate investing with the help of Mashvisor.
Who qualifies for a reverse mortgage and what benefits does it provide?
In order to qualify for a reverse mortgage, you don’t need to display a stable source of monthly income as you’ll be receiving money rather than paying money, and you can finance any associated fees, such as servicing payments or annual mortgage insurance, with the money you’re gaining from the reverse mortgage payouts. This leaves you with no ‘out-of-pocket’ costs outside of ongoing home insurance and property tax bills. Another benefit of this arrangement is that any money you gain back through a reverse mortgage is tax-free and does not affect your Medicare, social security, and Medicaid status. It is also a relatively safe option as you’ll never lose your real estate property due to over-extension since the payouts you receive are based off the remaining equity of your home.
Reverse mortgages are designed to aid those of retirement age, so you have to be at least 62 years old to qualify, and you also typically have to own around 45% or more of the equity in the real estate property. And while you can’t use a reverse mortgage on an investment property (you must live in your home for at least 6 months a year for it to qualify), you can use the income you gain from a reverse mortgage to invest in another investment property if you so choose.
The reverse layup is indeed one of the most beautiful plays in basketball, but it can also be a difficult move to pull off. In a reverse, your momentum is taking you away from the basket while you shoot and your eyes are faced away from it, so it’s not always easy to score.
Similarly, though a reverse mortgage can be a great tool for those entering retirement, retirees should also be aware of several potential pitfalls. A report to Congress on reverse mortgages noted that those that choose to cash out their reverse mortgage via one lump sum face a ‘heightened risk of scams, elder abuse, and unsuitable investments.’ As scammers or opportunists hear of the elderly receiving a large windfall, they may see them as an easier target and immediately move in to broach them with either a dubious investment opportunity or an outright real estate investment scam. Or even if they aren’t directly approached, retirees that suddenly receive such a large sum of money may be more prone to seek out ‘opportunities’ which end up siphoning off their cash.
Reverse mortgage terms can also be rather opaque, so it’s important to ensure that one has a clear idea of exactly what will happen if one signs on the dotted line. Remember that lenders are out there to make a profit, and they will seek to make interest rates and conditions as favorable for themselves as possible, sometimes in an unclear way. Compound interest can quickly mushroom, so it’s important to understand how the reverse mortgage will play out over a sustained length of time. Since reverse mortgages are a very weighty deal at a financially vulnerable time in life, retirees should not hesitate to have a trusted third party financial professional and/or real estate expert to help them to review their reverse mortgage options.
A crowd favorite
Most reverse mortgages are Home Equity Conversion Mortgages. Unlike other options, HECMs are insured by the government, so they’re probably viewed correctly as generally the more trustworthy option. In the last couple of decades, HECMs have boomed in popularity, going from a relatively niche tool to a fairly commonplace procedure, although their popularity has waned somewhat since their peak around the housing bubble crisis at the turn of the decade, after which stricter lending rules were put in place.
The government has also begun ratcheting up other regulations on HEMCs to provide better protection for beneficiaries, and hopefully this trend will continue to ensure the needed greater safety for the next generation of retirees.
Overall, a reverse mortgage usually take just 2-3 months to process but can potentially provide you with years of benefits, so you should definitely take the time to research this option more and find out if it is right for you. You may not hear any ‘oohs’ or ‘ahhs’ from an electrified arena, but you might be able to rest content that you made a beautiful decision for you and your family’s financial future.