Securing one’s financial future is among the most essential factors everyone must consider, because whether we like it or not, we would all enter retirement at some point in time. And, working long hours every day may not be an option anymore in the future.
However, many are not financially prepared when they’re nearing or entering retirement. Walking away from their jobs, they’re carrying the financial burden of paying off outstanding debts. Though it’s not the ideal retirement, it’s the reality for most near and current retirees.
Fortunately, there are several solutions to pay off debts strategically, and a reverse mortgage loan is one. It can be beneficial to retire debt-free by unlocking your home’s equity, but it may not always work for everyone. You can read on to know whether paying off your debts with a reverse mortgage loan is right for you.
What Is A Reverse Mortgage?
Like a traditional mortgage, a reverse mortgage loan allows you to borrow money using your home as collateral while the title remains under your name. But, the difference is that there’s no monthly payment in a reverse mortgage. You’re not required to repay the loan until you pass away or the home is sold or vacated.
Thus, as long as you live in the home, you’re not going to make any monthly payments on the loan balance. However, since you retain the homeownership, you will have to pay for property taxes, insurance, maintenance, and homeowner’s association fees as part of the loan obligation.
A reverse mortgage is specifically designed for retirees with limited income or savings. Therefore, you must be a homeowner who is 62 years of age or older to qualify for this type of home loan. It’s primary purpose is to help financially unstable retirees cover health care and basic monthly living expenses using their home’s accumulated worth. ***Note, there is a special new reverse mortgage for 60 and 61 year olds.
But, it’s essential to note, though, that there’s no restriction on how you’re going to use the proceeds of a reverse mortgage. You can even utilize it to pay off the financial baggage of existing debts.
Consolidating Debt With A Reverse Mortgage
Living with overwhelming debts during your retirement years can be more challenging than at any age. But it’s a good thing to know that there are financial solutions, such as Lendforall debt consolidation to help anyone who is struggling with multiple loans or debts.
With debt consolidation, you can combine your various debt obligations into a new loan. Instead of paying your debts separately, you can make it into one manageable payment with more favorable payoff terms. By paying all your debts as a single liability, you can save on lower interest rates and monthly repayments.
There are several forms of financing for debt consolidation. However, a reverse mortgage is among the best financial options to consolidate debts in retirement. By paying off debts using a reverse mortgage, many seniors or retirees can live their retired lives more worry-free in their homes’ comfort.
However, like any other type of loan, taking out a reverse mortgage loan to consolidate debts also comes with upsides and downsides. You can go over each of them to determine whether it’s the appropriate solution for you or not.
What Are The Pros?
Of course, a reverse mortgage wouldn’t be an option for many seniors or retirees if it didn’t benefit them in the first place. It might be worth looking into why it’s been used to consolidate debts during retirement.
Freedom From Monthly Payments
One possible outcome of retirement is a significant income reduction. Thus, having multiple debt obligations can be more problematic. But, consolidating them with a reverse mortgage can ease that financial burden since there’s no monthly payment required. You can pay off your outstanding debts faster without worrying about costly and monthly mortgage repayments.
Additional Cash Flow
You can take 55% – 75% of the equity from your home and get the proceeds without the tax burden. Once you consolidate and settle your debts, you can utilize the remaining amount to cover other expenses. Thus, you can have the additional cash flow to help you stay afloat.
Depending on your needs and preferences, the structure of a reverse mortgage may vary. You can get the mortgage amount as a lump sum, regular income stream, or as needed. It’s also up to you how much of the equity to access through a debt consolidation mortgage. Whatever your purpose is, you have several options to access the funds.
What Are The Cons?
The same with other loans, a reverse mortgage may not always be a suitable choice for everyone. Before you rush into putting your home up as a security for this type of loan, it’s essential to understand why a reverse mortgage didn’t work for others.
Hefty Upfront and Closing Costs
Though it’s tax-free and doesn’t require monthly payments, a reverse mortgage is not free. You would have to pay it at a particular time, along with the interest and fees. Also, you may end up paying more due to its significant hefty upfront fees and closing costs. Depending on your
home’s value, you can have more debt and less equity.
Several reasons can cause home foreclosure and it’s never the reverse mortgage itself that’s to blame. One instance is when you fail to pay on property taxes & insurance. In this instance, your home can potentially be subject to foreclosure.
Though a reverse mortgage is naturally designed to lessen the likelihood that you’ll default on your obligations, you may not always guarantee a perfect outcome with the increased financial pressures of your retirement.
Psychological and Emotional Strain
Consolidating your debts with a reverse mortgage can lessen the financial burden. However, it may still cause psychological and emotional strain, especially if you have other plans for your home. It can also hinder you from living in another place unless you’re ready to pay off the loan.
Should You Get A Reverse Mortgage Loan?
As you can see, a reverse mortgage loan also comes with potential risks. Though it’s beneficial to many retirees, it’s positive outcome lies in your capacity to commit to your financial obligations faithfully. While it’s an excellent financial tool to manage multiple debts, many people still fail to pay off their debt by taking on another debt like a reverse mortgage.
Keep in mind that using a reverse mortgage loan is a significant decision to make regarding your finances. Besides looking into it’s pros and cons, it may also help you consider not only your current financial condition but also the future one.
Getting a reverse mortgage loan is only among the temporary alternatives to alleviate one’s financial burden. There are still other financial solutions you can consider depending on your needs and resources. But, regardless of the type of loan you’re getting, taking track of your financial behavior is way more important.
Written by Lauren Cordell
Lauren Cordell is a financial advisor with more than 10 years of experience under her belt. She also works as a writer and a speaker for many companies and institutions.