A reverse mortgage is a powerful tool in the arsenal of older Americans seeking to generate new financial freedom. Reverse mortgages are a unique way to extract the capital value of your most valuable asset – your home – but this option isn’t for everyone. Considering what you might need the cash for and whether or not a reverse mortgage is a viable option is important before making any financial decision like this one.
What a reverse mortgage is.
A reverse mortgage payoff is a new loan in relation to your ownership stake in your home. When you purchased the property, you took out a mortgage and paid the financial institution a monthly payment in order to pay back this borrowed amount. A reverse mortgage is a loan that takes advantage of the equity you’ve already built up in the home (your ownership percentage of the property). This is different from a line of credit and doesn’t require monthly payments like a traditional mortgage. Instead, the interest on the loan is added to the balance and repayable after you decide to leave the home or after you pass on. For this reason, reverse mortgages are taken advantage of by seniors. These are borrowers who have created a majority or whole equity stake in their property and require some upfront capital in order to cover living expenses, an expansion, or a vacation.
What a reverse mortgage is not.
A reverse mortgage, however, is not free money, nor is it a loan in the traditional sense. In exchange for this equity paid back to you in a lump sum, you effectively sell the property rights to your home to the lender. This is often a great way for those without children to take advantage of the cash tied up in their homes, however, the ability to leave your home to your heirs becomes questionable with this course of action. Because of this transfer of equity back to a lender, a reverse mortgage is not for everyone.
Take advantage of the benefits of a reverse mortgage.
However, this course of action can create a unique opportunity for those looking to transfer their wealth into a new investment vehicle or generate new cash flow to cover expenses. A reverse mortgage can be used to fund anything you’d like it to, including stock buys or new property purchase. As well, your terms protect your heirs from having to pay back any interest that accumulated beyond the actual value of the home. This means that you won’t have to take a loss on the home even if you outlive the reverse mortgage interest rising above the value of your home.
This means that the capital can be leveraged into buying new commodities or other assets that can continue to generate wealth while you stay in your home. Realtors like John Foresi, the CEO of Venterra Realty, know the value of a new real estate purchase designed to generate a passive income stream with rental income, and this method has served investors well for generations.
Creating a stream of dividend income with this substantial line of capital can help buoy your financial needs for the foreseeable future with the capital that was once just resting in your home. Instead of letting it sit there gathering dust, you can leverage this equity into liquid cash that can be used to fund the remaining years of your retirement.
A reverse mortgage isn’t for every borrower. A home equity line of credit or a second mortgage designed to renegotiate the terms of your original borrower agreement are both viable options that do not chip away at your long term possession of the home. Each offers a unique benefit, so taking the time to explore your options for freeing up capital is worth it.