Living with debt is the biggest challenge facing today’s seniors. In fact, studies show that Older Americans are deeper in debt today than they were in 2003.
This makes sense. Baby Boomers have lived through some of the most economically volatile times in our nation’s history. Sure, when times were good, they were very good.
However, the setbacks like the bursting of the dot-com bubble, the Great Recession, or the end of lifetime employment have hurt the retirement outlook for millions of Americans. As such let’s review how a reverse mortgage can help you get out of debt.
What is a Reverse Mortgage?
You might be asking yourself “What is a reverse mortgage?”
Your home is probably your biggest financial asset or at least one of the biggest. But under normal circumstances, you can’t actually use that financial asset unless you sell the home or take out a standard loan against its value, which means that you would have an extra monthly loan bill to pay.
The third alternative is to take out a reverse mortgage, which is a type of loan where you will never have to pay each month and it is almost impossible for you to default.
You can pay back what you borrow whenever and however you can afford to. The total remaining balance will not need to be paid unless you no longer live there due to your death or moving away.
You’ve probably seen the commercials, but you might not know what a reverse mortgage is. These loans have been specially designed to allow seniors the chance to tap into the equity they have built up in their homes and have been around since the 1960’s.
Unlike traditional mortgages or home equity loans, reverse mortgages don’t require the borrowers to make monthly payments. Instead, the principal and interest accrues over time and the borrower will repay the loan when they either sell or move out of the house.
Another thing to know about reverse mortgages is that the clear majority of these loans are guaranteed by the Federal Housing Administration (FHA).
This is a good thing, as the government agency helps to regulate the terms of these loans to make sure they are fair. For example, a recently implemented rule regarding reverse mortgages means that the total amount due will never be more than the value of the home.
How Does This Help Me Get Out of Debt?
It might sound counterintuitive to take on debt to get out of debt, but that is exactly how a reverse mortgage can help. The reason for this is that reverse mortgages don’t require monthly payments.
As such, seniors living on a fixed income can use their funds to pay for living expenses instead of the servicing debt.
If this sounds too good to be true, it is not and millions of Americans have taken out these loans just for this purpose.
This is not to say that reverse mortgages are the right move for everyone. In fact, there are instances when this loan might not help you get out of debt. But for most Americans, it is an option they are considering to help secure their retirement.
What Do I Do Next?
If you think a reverse mortgage might be the right fit for you, then you should reach out to your financial adviser to discuss the pros and cons of a reverse mortgage.
In addition, you will need to get your home appraised. This will be used to determine its value and you might want to check out this guide for some tips to prepare for your appraisal.
Another thing you will want to do is to reach out to several reverse mortgage lenders to learn more about what they are offering how the costs will amortize over time. This will give you a chance to compare they programs and see which is the right fit for you.
Remember, it is more than just interest rate. You should also look at the closing costs and the associated fees to get an idea of the true cost of the loan.
Lastly, you want to sit with your financial adviser and devise a plan to pay off your debts. Don’t get into trap of using the funds from your reverse mortgage for some other purpose. Make a plan and see it through, this way you won’t have to worry about those pesky debts ever again.
Using a reverse mortgage to pay off your debts is not without risk and it might not be the right move for everyone.
However, these loans are becoming an increasingly important retirement planning tool for today’s seniors. As such, it makes sense to at least look at a reverse mortgage and to discuss the terms with your financial adviser.
Remember to talk to multiple lenders to find out all the details about their loan programs and the terms. Also, make sure you have a plan to play off your debt and that you follow it through. This way you can enjoy your retirement debt free.
So are you considering a reverse mortgage to clean up some of your debt? Share your thoughts and comments below.