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Reverse mortgage 101: Eligibility and benefits
Key takeaways:
- Reverse mortgages allow homeowners aged 60+ to receive payments from lenders based on home value while continuing to live in and own their property.
- Unlike traditional mortgages, repayment is only required when the borrower sells the home, permanently relocates, or passes away.
- Though providing steady tax-free income and allowing seniors to age in their own place, reverse mortgages reduce home equity over time and may impact inheritance.
Think of converting your house into a source of income in your golden years. A reverse mortgage enables elderly homeowners to access the value of their home without selling it. It is the reverse of a normal home loan - rather than you paying the bank, the bank pays you. For thousands of seniors with increasing expenses but sitting on valuable real estate, this choice could be a godsend.
However, few individuals know much about reverse mortgages or to whom it is available. Is it appropriate for your case? Let's demystify this financial instrument in plain terms. Learning how it works may provide new opportunities for senior citizens seeking financial assistance in retirement.
How a reverse mortgage works
A reverse mortgage is very different from other home loans. This is how it works:
The basics
In a traditional mortgage, you borrow to purchase a home and repay the lender in instalments. With a reverse mortgage, you already own your home. The lender sends you money depending on the value of your home, and you do not make monthly payments back.
Payment options
You can get money from a reverse mortgage in a number of ways. You can choose to get paid monthly for a specified period, having consistent income for a fixed number of years. Monthly payments for as long as one lives in the house are desired by some since they offer more financial security. A one-time sum of money is appropriate if you want a big amount immediately for hospital bills or repairs on the house. Most seniors opt for a line of credit that they can tap into whenever they need it, providing flexibility for those surprise expenses. You can also choose a combination of these options depending on your specific financial requirements.
Loan repayment
The loan becomes payable only on certain events.
- If you choose to sell the house, you must repay the loan out of the proceeds of the sale.
- The same holds true if you permanently relocate, for example, moving into a nursing home or somewhere else.
- The loan also comes due when the surviving borrower dies, causing repayment by the estate.
- Nonpayment of property taxes or insurance may also cause the loan to become immediately due.
- In the same way, failing to take care of the home may result in loan repayment, as lenders insist on keeping the property in good condition.
Eligibility requirements for reverse mortgages
Not everybody is eligible for a reverse mortgage. The following are the key requirements:
| Requirement | Details |
|---|---|
| Age | All borrowers must be 60 years or older |
| Homeownership | Must fully own the home or have a small loan balance |
| Property type | Must be a primary residence (where you live) |
| Property condition | The home must be in good condition |
| Financial assessment | Must have means to pay taxes and insurance |
Reverse mortgage calculation example
Dinesh and Reema have a house valued at ₹1 crore in Delhi. They are aged 65 each. Depending upon their age and property value, they may be eligible for a reverse mortgage, providing them with roughly ₹40-50 lakhs for 15 years. That could translate to a monthly salary of approximately ₹25,000-30,000.
Reverse mortgage advantages
Reverse mortgages can offer a number of benefits to seniors.
Steady income
A reverse mortgage allows for an ongoing stream of money in retirement years. This steady stream of income can pay for daily expenses, medical bills, or even minor luxuries that make retirement more enjoyable.
Live in your home
With a reverse mortgage, you remain in your home and retain the title. This lets you stay in your community among familiar neighbours and enjoy your independence and quality of life.
No monthly payments
With a reverse mortgage, you do not make monthly payments. This keeps your current income available for other purposes and removes the worry of paying monthly loan repayments.
Tax-free income
The funds you get from a reverse mortgage are usually not subject to taxation since it's viewed as a loan advance. This tax benefit is that you're able to spend the entire amount received without withholding parts for income tax.
Possible drawbacks to keep in mind
Although reverse mortgages have advantages, they also have drawbacks:
| Drawback | Explanation |
|---|---|
| Decreasing equity | Your home equity reduces over time |
| Fees and costs | Upfront costs can be high |
| Interest accumulation | Interest adds up over the years |
| Impact on inheritance | Less value for heirs |
| Limited loan amount | Generally lower than the full market value |
Who should consider a reverse mortgage?
A reverse mortgage might be an option for several categories of the elderly. Older homeowners who wish to remain in their homes but have additional income requirements for everyday expenditures might find this useful. Those with high home equity but limited financial or savings capital may consider switching some of this home equity to usable cash.
This route could be best suited for those with no desire to pass along the home to their heirs. It would also suit an elderly population, who will be able to still keep their house up to maintain it, in addition to taxation and insurance, which are the property owner's continued responsibilities.
Conclusion
A reverse mortgage could provide a financial lifeline for homeowners who are elderly and require extra income. It enables them to access the value of their home while still being able to reside there. But it's a serious choice that impacts both your financial future and your legacy.
Therefore, take your time to understand all terms, consult with financial advisors, and discuss with family members before proceeding. What works well for one person may not be ideal for another. With careful consideration of all options, you can make the choice that best supports your retirement goals and needs.
Disclaimer: This article is for information purposes only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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