You may have set aside some money for your retirement, but what if you do not think you have enough? Supplementing your income may suddenly become important, but you may feel you have limited options for doing that. A solution you can try, if you are a homeowner and at least 62 years of age, is to use your home equity to your advantage by getting a reverse mortgage on your home. Here's what will happen when you do so.
Your Reverse Mortgage Will Pay You
The biggest reason to consider a reverse mortgage as opposed to a regular home mortgage is a reverse mortgage will pay you. You can consistently receive payments that come out of your home equity (value) for a period of time with no need to repay any portion of the money in the short term. A standard home loan typically requires partial repayment according to a set schedule. Missing payments can cause you to be evicted. However, a reverse mortgage lender will give you no such scheduled repayment requirements for as long as you maintain ownership of your home and continue to live in it, leaving you free to spend the money to improve your retirement years in various ways.
You Can Choose a Private or Government Reverse Mortgage
A government-issued reverse mortgage is called a home equity conversion mortgage (HECM). Government agencies like the Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD) offer such loans, which are government-insured. However, you can also apply for a reverse mortgage through a private lender, such as a local bank. Private loans are still subject to some government rules but are not always as well regulated, which means you have to be careful of potential scams and only get a private loan from an institution you trust.
When getting a reverse loan from a private reverse mortgage lender or government source, you can only borrow part of your home equity because of laws in place to protect lenders from loaning too much and borrowers from borrowing too much. A tool known as a reverse mortgage calculator can calculate the total you can borrow.
You Can Choose How You Borrow the Reverse Mortgage Funds
Setting the terms of a reverse mortgage is fairly easy because of the flexibility involved. For example, once you figure out how much you can borrow with a reverse mortgage calculator, you can choose exactly how to receive the funds. One option is to draw funds only when you need them by setting up a home equity line of credit. Another is to request one large payment, such as when you need to pay for a major expense. A third, and often more useful, option is to ask for monthly payments from your lender for as long as there is still equity left you can borrow. That will allow you to enjoy extra income each month for an extended period of time. Then you can use the funds to pay for recurring expenses, if necessary.
You Can Only Take Out a Reverse Mortgage on Certain Properties
If you have a certain type of property, you may not qualify for a reverse mortgage. For example, you cannot typically request such a loan on a rental property with more than four rental units. If the property has four or less units it may qualify, but only if you use one of the units as your primary residence. You cannot request a reverse mortgage on a vacation property or any home you do not live in full-time.