Did you know that a senior citizen in India earns around 10,365 INR on average, according to a survey by Forbes?
But these earnings would not suffice for a senior individual citizen to meet his or her medical expenses or any other general expenditures. Their general source of income is from the schemes of the government. This could be because of the rise in inflation or many other factors. The increase in cost graphs makes it difficult for an average senior citizen to lead a normal life.
Understanding Reverse Mortgage Loans
In a mortgage loan, you buy a property from a seller, and the bank pays the value for you. You pay back the bank in installments for a specific tenure. On the contrary, in a reverse mortgage loan, you get installments from the bank against your loan. This type of loan is happening in the west.
If you want to opt for a reverse mortgage loan, you should own a primary property. Now the bank will determine the value of the house and sanction the loan amount. Here, the loan amount that you are going to receive will not be given at a stretch; you will be paid over a specific time period in installments. Along with the increase in tenure, there will also be an increase in the interest amount.
In simple terms, it allows you to receive a monthly income over a specified period of time by using a property as collateral.
Types of Reverse Mortgages
When you choose a reverse mortgage, you're not just tapping into a valuable financial resource, you are also selecting a payment plan that aligns with your unique needs and goals. Here is a breakdown of the six distinct options available to you, aiding you in making an informed decision that supports your financial wellbeing.
The Lump Sum
Need a significant amount of funds upfront to tackle a major expense or investment?
The lump sum option delivers the full value of your loan proceeds in one seamless transaction upon loan closing. This approach offers the predictability of a fixed interest rate, ensuring your payments remain steady throughout the loan term.
Equal Monthly Payments
Want a reliable stream of income to complement your retirement?
The equal monthly payments option, also known as an annuity or tenure plan, provides you with consistent payments for as long as you reside in your home as your principal residence. This plan offers the reassurance of ongoing financial support, regardless of fluctuations in interest rates.
Would you prefer to structure your reverse mortgage around a specific timeframe?
The term payments option empowers you to receive equal monthly payments for a predetermined period that aligns with your financial goals, such as 10 or 15 years. This flexibility allows you to customize your payment plan to match your unique needs.
Line of Credit
Value the freedom to draw upon funds as required?
The line of credit option functions like a credit card, enabling you to borrow money as necessary while only accruing interest on the amounts you actually utilize. This approach offers you maximum control over your finances and the ability to address unexpected expenses as they arise.
Equal Monthly Payments Plus a Line of Credit
Desire the security of a steady income stream coupled with the convenience of a flexible credit line? This hybrid option delivers the best of both worlds, providing you with consistent monthly payments while also granting you access to additional funds as needed. This versatility ensures you are equipped to manage both anticipated and unanticipated expenses with ease.
Term Payments Plus a Line of Credit
Seeking a payment plan that blends structure and flexibility?
This multifaceted option merges the predictability of fixed-term payments with the adaptability of a line of credit. It empowers you to receive equal monthly payments for a specified period while also retaining the ability to access additional funds as required, both during and after the initial term.
Beware of Potential Fraud
As with any financial product, it is crucial to be aware of potential scams when considering a reverse mortgage. Here are key steps to protect yourself:
Beware of Unsolicited Offers: Exercise caution if a contractor, vendor, or financial advisor actively approaches you, suggesting a reverse mortgage. Seek independent advice from a trusted source before making any decisions.
Protect Your Power of Attorney: Grant power of attorney only to individuals you trust implicitly. Regularly review your financial documents and statements for any unauthorized activity.
Question Financial Products: If a financial advisor recommends a product that requires a reverse mortgage to afford, seek a second opinion to ensure it aligns with your best interests.
Report Suspicious Activity: If you suspect a scam, contact the Federal Trade
While interest rates for reverse mortgage loans are generally higher than those for traditional home loans, the way interest is calculated and charged makes them even more expensive. Here is a detailed breakdown to illustrate this point:
For instance, consider a reverse mortgage of Rs. 65 lakh at a 10% annual interest rate with a tenure of 17 years.
Monthly Payout: The borrower receives a monthly payout of Rs. 12,212.51 from the bank.
Interest Accrual: Interest is charged on both the outstanding loan amount and the payouts received. This means the total loan amount owed to the bank increases over time, even though the borrower is making no monthly payments
The total interest charged over the 17-year tenure is Rs. 1,08,05,542.46, which is more than four times the actual payout received (Rs. 24,91,251.00).
The loan amount owed to the bank increases each year, even though no monthly payments are made.
It is crucial to understand this unique interest calculation method to fully grasp the true cost of a reverse mortgage loan.
Is a reverse mortgage right for you?
A reverse mortgage loan can be a savior option for senior citizens who need to supplement their income and want to continue living in their homes. However, it's crucial to carefully weigh the costs and limitations of these loans before making a decision. It's recommended to consult with a financial advisor to determine if a reverse mortgage is suitable for your individual financial circumstances and goals.
Commission (FTC) or your state's consumer protection agency immediately.