In the following video ARLO™ explains how a reverse mortgage works in comparison to traditional loan types. This educational video uses 3 examples of how a reverse mortgage can work into your retirement strategy.
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Transcript:
In the following video I will explain how a reverse mortgage works in comparison to traditional loan types.
Let us jump right into it!
With a traditional mortgage, you make structured monthly payments (usually over 15 or 30 years). The amount you owe is reduced by each payment you make and therefore the equity you have in your property increases over time. On the other hand, with a reverse mortgage you have the option to make NO monthly mortgage payments. Instead of writing a payment back to the bank, that interest payment is simply added to your loan balance and your equity position may decrease over time. While mortgage payments are not required, you may choose to make payments to keep your loan balance from rising. Now, let us look at a couple different approaches to having a reverse mortgage and compare them to traditional loans.
Alex, Jane, and Jack all took out a $250,000 starting loan balance. Alex got his $250,000 as a 30-year mortgage and will be paying principal and interest payments for the next 30 years. As he makes his payments, the loan balance (the amount he owes the bank), decreases over time. His home value increases… And so does his remaining home equity. His line of credit however remains zero as traditional loans are closed end and do not allow for you to reborrow funds in the future.
Now let us look at Jane.
Jane, who took a reverse mortgage, decides to make some repayments to keep her balance from rising. Because reverse mortgages are OPEN ENDED loans, the lender is required to increase Jane’s available line of credit by each payment she applies to her loan balance. Over time, Jane will have preserved her home equity all while growing a sizeable line of credit reserve. These funds may be borrowed later to fund long term care or other related retirement expenses. Just like Alex, Jane’s home value increases over time. And in turn she retains much of her home’s equity.
This ultimately yields to an increase in her equity that she will pass to her family, and the financial security of a flexible line of credit to fund unexpected retirement expenses.
Finally, we have Jack, who took a reverse mortgage, but has decided to make no repayments for his lifetime in the home. As a result, his loan balance increases…But over time his home value rises, increasing his remaining home equity, albeit at a lesser rate than his counterparts. At the end of the day, or in this case- at the end of the 30 years, both Jane and Jack have benefitted from their reverse mortgages in different ways. Jane, by making payments of her choice, afforded her heirs a great margin of inheritance and retired in confidence with a line of credit reserve for the unexpected. And while Jack may not be passing on as much equity to his heirs, he afforded himself the freedom of not making any mortgage payments on the $250,000 tax free release of his home’s equity.
Summary:
Reverse mortgages can seem complicated but in reality, it is simply a loan against your home that can be repaid at any time, whether that be at the end of life when your home sells, or by making voluntarily repayments while you’re alive. Repayments may be made as interest only, interest plus principal, or any amount you choose. You’re in the driver’s seat! As with all mortgages, you will receive a monthly statement that will outline the interest charges, loan balance and line of credit activity. One thing to keep in mind is with a reverse mortgage you own your home and are responsible for maintaining future property charges such as your taxes and homeowner’s insurance.
