Given the recent housing crash, people tend to be suspicious of any mortgage that is considered unconventional. Although unconventional, lifetime mortgages are not a lending scam. For many seniors, a lifetime mortgage can be the right decision, given the right circumstances. In fact, if you’ve come up short on savings and your social safety net is insufficient, you don’t have a lot of options to fund your retirement besides working longer. A lifetime mortgage might be your only recourse.
The Problem With Home Equity as a Senior
Many seniors have sufficient net worth to fund a comfortable retirement. According to the Fed, home equity represents 80% of all wealth owned by Americans age 62 and older. The problem that these seasoned citizens face is two-fold:
- A big chunk of a retiree’s net worth is tied up as equity in a home
- And selling that home means a tradeoff between more retirement cash for higher monthly expenses.
The situation creates a no-win scenario where neither owning nor selling a home allows the homeowner to obtain the monthly cash flow that they need. In this situation, a lifetime mortgage could be the perfect alternative.
How Lifetime Mortgages Work
Lifetime mortgages are often called reverse mortgages because they are a mortgage that works backwards.
If you own a house free and clear or have a large chunk of equity, you can take out a mortgage with a bank against the equity just like a refinance. Instead of receiving a large chunk of money and a monthly payment, the bank pays you monthly. You then receive those fixed payment over the term of the mortgage.
Once the term has ended, you stop receiving payments. However, you still retain ownership and live in your house until you and your spouse pass away. Upon your passing, the mortgage company will put your house up for sale to recoup for the principal and interest you borrowed.
Advantages of Lifetime Mortgages
The lifetime mortgage offers many benefits to those who need more monthly income to afford retirement.
- It offers homeowner’s an opportunity to use the equity in their home without increasing their monthly living expenses
- You retain ownership and can live in your house until you pass away
- Your estate is entitled to receive gains from any appreciation in home value after you take out the mortgage
- Payments that you receive from the bank are not subject to income tax
- Mortgage interest paid is tax deductible to your estate
Disadvantages to Lifetime Mortgages
While lifetime mortgages can help increase your fixed income in retirement. There are definitely some risks and drawbacks:
- Your heirs will get less of an inheritance, since a lifetime mortgage drains the equity in your home
- Any principal that you still owe reduces the amount you can mortgage
- Although less risky than conventional, there is a danger to mortgage foreclosure if you can’t make payments on property taxes and homeowner’s insurance
- Interest rates might be higher than conventional loans
- Interest rates vary by age, with younger borrowers paying higher rates
While a lifetime mortgage is not right for everyone, it can be a viable alternative for retirees who want a larger fixed income for no additional monthly expense.