The troubled economy, pandemics and social unrest have made the idea of retirement very uncertain for many seniors who are now struggling to come up with ways to securely finance their futures.
What most senior homeowners don’t realize is that getting a line of credit through a reverse mortgage can help them preserve their equity from inflation, as it will allow them to lock in on historically low interest rates and current home values which have grown tremendously in recent years, and increase the amount of loan funds available to them still more in the future.
Reverse mortgages can be taken out by people aged 62 or older who either own their homes outright, or have a very low mortgage balance. While there are income and credit qualification requirements to obtain a reverse mortgage, they are much easier to meet than a standard or forward loan.
The loan allows seniors to access the equity in their homes in several different ways, including a line of credit, monthly payments, a lump sum, or a combination of these options.
Seniors can then use that money for multiple purposes, including monthly expenses, medical bills, or paying off an existing mortgage.
The loan does not have to be repaid as long as the senior remains living in the home and pays property taxes and mortgage insurance, on the assumption that the balance of the loan will be paid off through the sale of the estate once the homeowner moves away or dies.
By far the most popular option for reverse mortgages is the line of credit, available only as an adjustable rate. And, with interest rates at their lowest since the Great Depression, now is the time for seniors to lock in the low life caps on maximum rates and make full use of current purchasing value, says financial planner Karen DeRose, managing partner of DeRose Financial Planning Group.
Taking out a line of credit through a reverse loan will serve to shield a homeowner’s assets from inflation in two ways, she says.
“You’re locking into a lower rate now, because if you decide to do a reverse mortgage in the future, rates might be higher, and it will cost you more in interest,” says DeRose.
Secondly, she continues, you’re accessing that money now.
“You’re shielding yourself from a possible drop in the value of your home as well, because you’ll have that money now, and you’ll be able to work with it now,” she added.
We would like to add to what Ms. DeRose says in that the line of credit grows monthly on the unused funds so that the money you do not borrow today becomes a larger line of credit available to you tomorrow. Many people mistakenly think that this is interest you are earning on the unused funds on your line of credit. This is not interest you earn as these are not funds you have in a bank account somewhere. It is rather an increase in the amount of money you have available to borrow at a later date.
Sometimes this increase can be quite large. This can be extremely beneficial for borrowers who need more funds available for them to borrow later for medical expenses, travel or other needs. You do not accrue any interest on any funds you do not borrow and only begin to accrue interest on funds as you actually borrow them.
So if you never use the funds, you or your heirs do not have to repay them when you sell the home and if you do need them, they are available to you.