Are your parents struggling to get through retirement? They aren’t alone. The National Council on Aging shows that 80% of households with aging adults is struggling financially.
There is a solution that they can consider. Your parents could take out a reverse mortgage to fund their retirement. You might want to encourage them to do so if they are facing financial challenges. This could be one of the best ways to help support aging parents.
You can try finding out how much money you can make with a reverse mortgage. One calculator by All Reverse Mortgage has been programmed to help people determine the amount of money that you can receive based on your property value and other relevant criteria.
What is a Reverse Mortgage?
The United States Federal Reserve defines reverse mortgages on its website. In layman’s terms, a reverse mortgage as a credit or loan secured by a mortgage that falls on the habitual residence. Homeowners that take out reverse mortgages will get a regular cash payment based on the equity of their home, which can be used to pay their living expenses.
In reality, a reverse mortgage is the opposite of a conventional mortgage. In other words, you do not borrow money to buy a property, but you already have a property and you borrow money that is secured by it. Due to its characteristics and requirements, it is usually an option for elderly people who do not have sufficient income or who need to supplement their pension.
The main advantage of the reverse mortgage is that it makes it possible to monetize the habitual residence without having to sell or rent it and that the person requesting it does not have to pay any credit.
Requirements to Get a Reverse Mortgage
To apply for a reverse mortgage, you must be the owner of the guaranteed property and it is recommended that this be your primary residence. However, you might be able to qualify for a reverse mortgage on a property that is not your primary residence.
In addition, you must be over 65 years of age, although people with a disability equal to or greater than 33% or with a severe dependency can also apply for this financial product regardless of age.
Types of reverse mortgages
There are three types of reverse mortgages. In the first, the ownership of the property is transferred to the financial institution in question. This means that the legal heirs cannot repossess the property, but the payment to the mortgagor is guaranteed for all the years of his or her life, as well as his or her right to inhabit the property.
In the second, ownership is not transferred, so the heirs can recover the property, but if the longevity risk is exceeded, the mortgagor will no longer receive the supplementary income.
Finally, there is a third option of a reverse mortgage combined with deferred annuities in which ownership of the home is not transferred and the longevity risk is eliminated, but a lower income is received.
Also read: Reasons Why Getting a Loan Can Help You
Advice for Getting a Reverse Mortgage
For Elisabet Ruiz, professor of finance at the UOC, the best option is always to save and invest before taking out a loan. But, if your parents are already at an advanced age and have no savings, then a reverse mortgage is a good option to have a decent life. However, several aspects should be taken into account.
It is important to know that money comes at a reasonable cost, which is the interest rate, so it is advisable to compare it in different banks. To know if you are getting a good deal, you should ask for the interest rate of the operation, the APR (Annual Percentage Rate). The maximum recommended interest rate on a collateralized loan such as a reverse mortgage should not be higher than 4%.
The interest rate will determine the debt accumulated over the years, so your parents will have to be aware that when they apply for a reverse mortgage they are inheriting a credit. They need to understand that you will need to pay it back if the reverse mortgage doesn’t automatically give the home to the bank by default.
The person who takes out the mortgage will not have to pay anything, but when he or she dies, the heirs will have to comply with the debt. Most of the time they will have one year to do so and several options: return the money to the bank to keep the house, sell the house and pay the debt or take out a new mortgage to gradually pay off the debt generated.
You should still budget properly, because a reverse mortgage won’t cover all of your financial needs.