A reverse mortgage is a mortgage loan aimed at people over the age of 65 or people that can prove a degree of disability equal to or greater than 33% or dependents who are homeowners. Contrary to the way that traditional home loans work, the holder receives a regular payment from the credit union or bank (generally in the form of the monthly rent).
Thus, in addition to not losing ownership of your home, you are allowed to continue to live in the home until your death. This can be a great benefit for people that work with brands like All Reverse Mortgage.
These are popular financial instruments. It is expected that $4.9 billion in reverse mortgage loans will be issued in 2019 alone.
Frequently, the entity offers simultaneous contracting of a life annuity insurance in order to guarantee that the elderly can receive this complimentary income until their death, if they so wish. The entity that grants the reverse mortgage cannot demand the repayment of the accumulated debt until the holder’s death or the last of the beneficiaries of this credit system, as established in the contract.
Upon the death of the holder, the heirs will be entitled to both the ownership of the property as well as all debt accrued with the bank and can choose between two options:
- Keep the house: to do so, they must pay off the debt on the reverse mortgage, returning the money lent. If they do not have the equity to do so, they can finance themselves by taking out a regular mortgage on the house for the debt.
- Selling the house: They may also choose to sell the house to pay off the remaining balance on the reverse mortgage. If the amount is not sufficient to satisfy the accumulated debt, the entity may request the sale of other assets of the estate.
In short, a reverse mortgage can be a great alternative to supplement a retiree’s pension or Social Security benefits. As it is a loan, this additional monthly income is not taxable for personal income tax purposes.
Why Are Reverse Mortgages Becoming More Popular?
Why have reverse mortgages become a lot more popular in recent years? One reason is that the Social Security system has become much less reliable due to rising life expectancies, lower fertility rates, and underfunding. This means that people will turn to things like reverse mortgages to pay the bills.
On the assumption that, although it may have to face new reforms to meet the major challenges it faces, the sustainability of the pension system is not in question. However, there are many questions that arise for current workers, especially the younger ones, regarding their future retirement:
- At what age will I be able to retire?
- How much will I have to work to reach my full pension?
- What period of contributions will be taken into account for calculating my pension?
- And, above all, how much will I receive as a retiree?
The main challenge facing pension systems in developed countries, including the United States, is demographic. We are living longer than ever before and with levels of health and welfare that have never been seen before. And this is a phenomenon that has no signs of stopping. If life expectancy is currently around 83 years, by the middle of this century it could be close to 90 years. At the same time, we have fewer children than ever before. The current fertility rate in the United States is 1.7 children per woman, a rate far from that which would ensure the generational replacement of 2.1 children per woman. For comparison, the fertility rate was 3.65 children per woman in 1960.
An aging population is a real challenge for a pay-as-you-go pension system. Many beneficiaries, who also receive benefits for an increasing period of time, and few contributors.
This creates a lot of challenges for future pensioners. Uncertainty is a variable that must be learned to deal with, and far from being a brake on retirement planning, it should be a spur to try to ensure a peaceful retirement in any future scenario. Information makes a fundamental contribution to this objective.
The better-informed workers are, especially with regard to the level of income they will have in retirement, the better and wiser decisions they will be able to make. They will also be more likely to appreciate the benefits of other options like reverse mortgages. The ball is in the court of the individuals themselves, but also of the governments with initiatives such as the one carried out in Sweden, which has not yet been implemented in Spain: the annual sending of information to workers about their estimated future pension.