What is a Reverse Mortgage? And How it Can Help!

This is a guest post…

People often think of retirement as a time to kick back and relax. However, you might have a different view, especially if you’re missing the regular money from your job. If your new limited retirement income has you worried, a reverse mortgage is a way to get rid of that concern. Here is a brief overview of how the reverse mortgage idea began and why it helps when you are retired.

The Unique Features of a Reverse Mortgage

Before you can understand how a reverse mortgage can assist you during retirement, you need to understand what makes it unique. Essentially, it is a long-term mortgage instead of a traditional mortgage, which is typically short-term. The long-term aspect of a reverse mortgage allows you to pay it off in your own good time. Unlike a traditional mortgage with its payment schedule, a reverse mortgage does not increase the bills you have to pay all the time. It lets you spend the money during your retirement with much less stress and fewer rules.

Where the Reverse Mortgages all began

Reverse mortgages began in the United States in 1961. It all started with a woman in Maine who went to a lender panicking. She feared she would lose her home because her husband’s regular income had been lost. After much thought, the lender came up with an agreement that would help her keep ownership of her home with minimal risks to both borrower and lender. The contract the lender came up with has since become the reverse mortgages offered by many lending institutions today.

Today’s reverse mortgages are not quite like that first one in 1961. One difference is, if you want, you can apply for a Jumbo reverse mortgage through federal agencies now. Those mortgages are called home equity conversion mortgages (HECMs) and are insured by the Government. Another difference is all reverse mortgages in the United States today are subject to federal rules designed to protect home owners like you and lenders.

What Government Regulations Mean During Reverse Mortgage Application

The biggest issue with reverse mortgages now being under federal regulation is you cannot borrow the total value of your home. You must only borrow an amount allowed at the federal level. Such caps are necessary to keep you from borrowing more than you can handle and keep the lending institution from making a mistake by loaning out too much.

Why Borrowing with a Reverse Mortgage Makes Retirement Easier

The way a reverse mortgage is set up makes retirement easier because it allows you to know exactly what you can borrow. It also lets you spend the money for any items or events you want. As long as you keep living at the residence, you have no imposed regulations regarding how the money is spent or paid back. Therefore, whether you want to cover required expenses or enjoy your retirement more, such as by taking up new hobbies, the money is readily available and free of immediate repayment obligations.

A Reverse Mortgage Has Some Long-Term Downsides

Before signing a reverse mortgage contract, understand there are some long-term downsides. For example, there is higher interest to pay because of the long-term nature of the loan. You are also forced to stay in the home for many years, unless you opt to allow the sale of the home or pay back the loan early. Those downsides are important, even if they seem far off right now.

Signing a Reverse Mortgage Contract or Not

Ultimately, the decision to sign a reverse mortgage contract or not depends on your current situation, as well as where you see yourself several years down the line. For example, if you want your home to remain in your family, you need to make sure you are capable of repaying the loan balance or avoid getting a reverse mortgage in the first place. However, if your only concern is living comfortably in the here and now, a reverse mortgage can certainly help you do that.