Among the four primary ways a retiree can use their home’s equity to create additional cash flow in their post-working years, a reverse mortgage is one such potentially viable option based on the specific situation of the senior making the choice. This is according to an article published at U.S. News & World Report.
A reverse mortgage, more specifically a Home Equity Conversion Mortgage (HECM) backed by the Federal Housing Administration (FHA), can convert home equity into cash either via lump sum or small disbursements, as explained by Ralph DiBugnara, president of Home Qualified and senior vice president at Cardinal Financial in the New York City area.
When the homeowner leaves the home either after they die or move out of the property, the proceeds from the home’s sale will be used to repay the loan balance, interest and fees, DiBugnara explains to the outlet.
However, reverse mortgages are not always a good fit for a senior according to Juan Carlos Cruz, founder of Britewater Financial Group in Brooklyn, New York.
“Be sure to do your research and understand that certain terms and conditions apply that may consume more equity than you had planned to use,” Cruz tells U.S. News. “Speak with a loan specialist in regards to the details of how reverse mortgages work.” This is particularly salient if a borrower has a desire to leave their home to an heir as a bequest asset, specifies the news outlet.
Cruz explains that home equity can serve as an untapped source of funds in retirement, though other options beyond reverse mortgages exist in terms of tools designed to tap that equity.
These can include downsizing into a smaller home and using the leftover funds in investments; selling a current home in order to move to a less expensive location; or taking ou a Home Equity Line of Credit (HELOC).
“HELOCs are probably the easiest way to access your equity,” Cruz says. However, a drawback of this method can be the variable interest rates that often accompany a HELOC, which could complicate budgeting for repayment especially for retirees who are on a fixed income.
“[Retirees] have to face the realization of having to reduce their lifestyle or to look for other sources to help fill in retirement income gaps,” Cruz tells U.S. News.
Read the article at U.S. News & World Report.