Reverse Annuity Mortgage

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What Is A Reverse Annuity Mortgage?

A reverse annuity mortgage, or RAM, is a loan for seniors who have paid off their houses but cannot afford to stay in them or require extra money for home repair, long-term care, medical treatment, or other reasons. It allows a homeowner to convert some of the equity he or she has built up in his property into cash. The loan is repaid when the borrower dies, sells his house, or moves out of it.

There are two types of RAMs: fixed-rate and adjustable-rate.

  • With a fixed-rate RAM, the interest rate is set for the life of the loan, so your monthly payments will never change.
  • An adjustable-rate RAM has a lower interest rate for the first few years of the loan, but it can adjust upward after that, which could increase your monthly payments.
Reverse Annuity Mortgage

How Does A Reverse Annuity Mortgage Work?

A RAM is a loan against your home equity, so you don’t have to sell your house or take out a new mortgage. The lender gives you a lump sum of cash, which is typically tax-free, and you can use it for any purpose. You don’t have to make monthly payments on the loan, but the interest accrues and is added to the loan balance. This means that if you live in your home for a long time, the loan could grow to be larger than the value of your home.

When the loan becomes due, you or your heirs can either sell the house to repay the loan or turn it over to the lender. If the sale price of the house is more than the outstanding balance on the loan, you or your heirs get to keep any leftover equity. But if the sale price is less than the balance of the loan, you or your heirs are responsible for paying off the difference.

Related Reading: Who is the Best Candidate for a Reverse Annuity Mortgage?

A Reverse Annuity Mortgage

Types of Reverse Mortgages

When considering a reverse mortgage, homeowners have three types to choose from. Each type has its own eligibility requirements, terms, and sources of funding. Understanding the differences between these options can help homeowners make an informed decision that best suits their needs.

1. Home Equity Conversion Mortgage (HECM)

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). This type of reverse mortgage is backed by the federal government and insured by the Federal Housing Administration (FHA). With an HECM, homeowners can convert a portion of their home equity into loan proceeds. The loan funds can be received as a lump sum, a line of credit, fixed monthly payments, or a combination of these options. The loan becomes due when the homeowner sells the home, moves out permanently, or passes away.

2. Single-Purpose Reverse Mortgage

Another option for homeowners is the single-purpose reverse mortgage. This type of reverse mortgage is offered by state and local governments or nonprofit organizations. Single-purpose reverse mortgages are typically intended for specific purposes, such as home repairs, property taxes, or medical expenses. Eligibility criteria and loan terms may vary depending on the organization providing the loan.

3. Proprietary Reverse Mortgage

Proprietary reverse mortgages are offered by private lenders and are not insured by the federal government. These loans are typically available to homeowners with higher home values and are tailored to meet the needs of specific borrower profiles. Proprietary reverse mortgages may offer additional flexibility and higher loan limits compared to other types of reverse mortgages. However, eligibility criteria, loan terms, and interest rates can vary significantly depending on the lender.

It is important for homeowners to carefully evaluate their options and consider their financial goals before choosing a specific type of reverse mortgage. Seeking guidance from a reputable reverse mortgage lender or financial advisor can help homeowners navigate the complexities of each option and make an informed decision.

Pros And Cons Of A Reverse Annuity Mortgage

There are both pros and cons to taking out a RAM.

Some of the advantages include:

  • You can stay in your home as long as you want without having to make monthly payments.
  • You can use the money from a RAM for any purpose, including home repairs, medical expenses, or living expenses in retirement.
  • A RAM can provide a source of tax-free income in retirement.

Some of the disadvantages include:

  • The interest on a RAM accrues over time, which can increase the balance of the loan and reduce the amount of equity you have in your home.
  • If you live in your home for a long time, the loan could grow to be larger than the value of your house.
  • Your heirs may have to sell the house to repay the loan if you die or move out of it.

If you are considering a reverse annuity mortgage, it is important to weigh the pros and cons carefully to decide if it is right for you. You should also speak with a financial advisor to see if a RAM is a good fit for your situation.

Reverse Annuity

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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