BEYOND THE PENSION: EXPLORING THE REVERSE MORTGAGE

When the average monthly pension received during 2023 was 9,600 pesos (less than 600 dollars) according to information from the National Commission of the Retirement System Savings Commission (CONSAR), many seniors struggle to maintain their lifestyle. In an effort to increase their income and remain in their homes, some resort to tapping into the equity built up in their homes through an interesting form of financing: the reverse mortgage.

Geared specifically toward seniors, reverse mortgages can be a great tool. Below, we’ll talk about how reverse mortgages work, and what those considering them should know.

What is a reverse mortgage?

A reverse mortgage, like a mortgage loan, allows older homeowners to borrow money using their property as collateral. The difference with respect to a mortgage loan is that while in a regular mortgage loan the owner of the property usually has the full amount of the loan from the beginning, and then makes monthly amortizations to repay the loan, in a reverse mortgage the owner of the property receives the amount of the loan in monthly installments, having the possibility of paying it off at the end. Hence the name reverse mortgage.

Seniors who take out a reverse mortgage can continue to live in their home, and the financing must be repaid in full to the lender when the borrower dies or transfers ownership of the property.

How does a reverse mortgage work?

Typically, reverse mortgage candidates are seniors who own a home that is free and clear of encumbrances. These seniors often use reverse mortgages to supplement their pension income, make home repairs or improvements, or cover medical expenses.

The size of the line of credit, known as the principal amount, can vary depending on several factors, such as the age of the borrower, the interest rates on the property, and the value of the property. Homeowners are likely to receive a larger line of credit the older they are, the higher the value of their property and the lower the interest rates.

Interest on a reverse mortgage is charged on a monthly basis and may be paid during the life of the financing or until the end of the financing. If you are considering a reverse mortgage, you should keep in mind that you will also have to continue to pay for property taxes, property insurance and maintenance.

Benefits of a reverse mortgage

A reverse mortgage can benefit homeowners seeking additional retirement income. Many people use reverse mortgage proceeds to supplement their pensions or any other income they may have. Additionally, since it is a credit, these resources are tax free, it is not necessary in all cases to make monthly payments, and in some cases the interest can even be paid from the monthly amount received by the borrower.

The reverse mortgage is an alternative for many seniors that allows them to remain in their homes during their retirement, while receiving resources in addition to their pension to meet their obligations or maintain their lifestyle.

The risks of reverse mortgages

Although in many cases it is not necessary to make monthly amortizations, this does not mean that interest on the loan does not have to be paid. Thus, when the time comes to cover the financing, the amount may seem surprisingly high, especially if no monthly payments are made or only the interest is paid.

Of particular relevance is that in the event that at the end of the term, the outstanding balance of the loan exceeds the value of the property at the time of the owner’s death, his or her successors may be required to transfer ownership of the property to the lender.

Another common complication related to the reverse mortgage relates to other persons living in the same property with the borrower.

In conclusion, the reverse mortgage is an interesting financial option for seniors who wish to ensure their financial well-being during their retirement. By allowing them to access the equity in their homes, they can access financing, supplement their pensions, and cover their essential needs without having to leave their home. However, it is crucial that those interested thoroughly understand the terms and conditions, as well as the long-term implications of this type of financing. With careful planning and proper advice, a reverse mortgage can be a strategic tool to ensure a comfortable and dignified retirement.