Taking out a reverse mortgage on your home is a smart financial solution to access tax-free cash from the value of your home. Because you don't have to make regular monthly mortgage payments for as long as the home remains your primary residence, a reverse mortgage can be an effective way for you to manage your household finances, especially when faced with inflation and a recession.
Given that the cost of living is increasing rapidly these days, you might wonder how a reverse mortgage can help you beat a recession and stay on top of your expenses.
Here's what you need to know.
How a reverse mortgage works
A reverse mortgage is a loan secured against the value of your home. If you're 55 years of age or older and own a home that is your primary residence, you can apply for a reverse mortgage and borrow up to 55% of the current appraised value of your home tax-free cash, as a lump sum or in regular monthly deposits.
As long as you own the home and it remains your principal residence, you aren't required to pay back anything on the balance, until you move or sell your home. At that point, you pay back the entire balance in full, including the interest and fees.
With the no negative equity guarantee, the final amount owing will not exceed your home's fair market value, even if your home's value drops, as long as you meet your mortgage obligations.
What can the money be used for
You can use the money obtained through a reverse mortgage for anything you need, such as boosting your retirement income, buying a second property, helping your relatives meet their financial obligations, paying off high-interest debts and much more.
Recessions and reverse mortgages
If you're living on a fixed income, a recession can drastically impact your financial stability. With the cost of living - from groceries, to gas, to household items - increasing rapidly, your finances could be stretched thin. Along with the cost of consumer goods, interest rates are also rising.
Meanwhile, if you have investments and feel the financial pinch, you might be tempted to cash in. When the market is down, the value of those investments drops substantially, causing huge losses unless you can leave your money where it is until the market recovers.
Unfortunately, if you're having difficulty making ends meet, you might feel you're running out of financial options. Or, you might have to make some tough decisions about changing your quality of life or selling your home.
Reverse mortgages offer some protection against a recession. Because you can use the money for anything you need, you can leave your investments alone until the market recovers. This gives them time to increase in value. During that period, you aren't required to make payments on your reverse mortgage, so you aren't taking additional risk by keeping your investments.
Additionally, you don't have to take out all the money you qualify for all at once. For example, you can be approved for $300,000 but only use $50,000. You can withdraw against the remaining amount as needed or leave it untouched. Alternatively, you can take out a lump sum or set up monthly or quarterly deposits.
Finally, a reverse mortgage has lower interest rates than a credit card and many other financial products you might use to cover your cost of living. For example, rather than putting your monthly bills on a credit card, which comes with a high-interest rate and a required monthly minimum payment, you can use the cash you obtain from your home at a lower interest rate.
The bottom line
Depending on your financial circumstances, a reverse mortgage can be a useful financial solution to help you manage your finances during a recession.
It can supplement your income, enable you to pay off debts, or allow you to make necessary improvements to your home, so you don't have to worry about selling your home or cashing in your investments to make ends meet.
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