While the Federal Reserve is taking their sweet time in raising interest rates, it is denying seniors the investment income they are in need of. On the other hand, taking their time in hiking up the interest rates could help out the older Americans in the long run as lower interest rates will enable seniors to generate an income through a reverse mortgage.
How does reverse mortgage work?
Borrowers receive cash on a reverse mortgage from their lender which is the same thing as getting an advanced payment for the equity of a home. Usually, this is tax-free, and the loan can be set-up as a line of credit, which means you will be able to draw down on the amount you need the most.
It is possible to get a larger mortgage amount if you go with the lowest interest rates: if you have an interest of 5% and you are a homeowner of 65 years of age, you could get a reverse mortgage up to $270,500 for a house costing only $500,000. At the maximum interest rate of 7%, the amount would only be $182,000.
Retirement and its problems
“A percentage of those entering into retirement will not be sufficiently prepared financially to keep up a normal standard of living, along with being able to pay on their medical bills,” stated Steven Sass, the director of the program of the Center for Retirement Research. He said “when their only source of equity comes from their homes, and nothing is coming from a 401(k), they need another way in accessing their equity.”
To work towards a retirement income, always find out what risks and downsides are involved before rushing out and taking out a reverse mortgage. It is important to know that interest will be added on the outstanding balances each and every month − this can add up quickly.
Anytime the homeowner receives cash, it reduces the amount of equity they have in their home. Which means that the equity they once had in their home can be reduced tremendously, or even used up.
There is also the issue of not being able to pay the property taxes or the premiums on insurance to cover the home. Some people, when in distress, turn to reverse mortgage just to keep going. However, most fall behind on their insurance or taxes.
All consumers should be alert for marketing of reverse mortgage. This includes anyone that tries marketing you a special deal that comes in combination with different financial products, and when a reverse mortgage is added into an annuity, it makes the transaction less noticeable to the consumer while creating more fees.
Was this article helpful? Feel free to comment below and check out what to do after you mortgage application has been denied and learn what lenders look for.