What are Reverse Mortgages and Annuity?
Although reverse mortgages and annuities are two quite distinct financial products, they are both intended to produce a consistent, reliable stream of income for retirement. However, if you’re contemplating either of these solutions, you should be aware that they have significant distinctions.
The most basic distinction is that a reverse mortgage is a loan, but an annuity is insurance. Another factor is how both products are financed: A reverse mortgage allows you to borrow money against the value of your home. The purchase of an annuity demands a significant sum of cash up front. There are significant variances in terms of the level of security provided by each product, as well as the tax consequences.
Reverse Mortgage Definition
A reverse mortgage is a home loan secured by a residential property that allows the borrower to access the property’s unencumbered value. The loans are mostly targeted at senior citizens and do not require monthly mortgage payments. Property taxes and homeowner’s insurance are remain the responsibility of the borrower. Reverse mortgages allow seniors to tap into the equity they’ve built up in their homes today while deferring repayment until they die, sell, or move out. The interest on a reverse mortgage is added to the loan total each month because there are no necessary mortgage payments.
A fixed annuity is an insurance contract that guarantees the buyer a particular, guaranteed interest rate on their account contributions. A variable annuity, on the other hand, pays interest that varies depending on the performance of an investment portfolio specified by the account’s owner. In retirement planning, fixed annuities are frequently employed.
Annuity and Reverse Mortgage Risks
The majority of people utilize a reverse mortgage or an annuity to reduce their financial risk; both products can be used to provide a guaranteed income stream in retirement. Both programs safeguard you from stock market and home price volatility, and both are risk-free in this regard.
A fixed annuity guarantees that your money will receive a fixed rate of interest, resulting in the same payout year after year. This investment is completely risk-free. The insurance company takes on all of the risk and ensures that you will meet the stipulated interest rate. Fixed annuities are not in any way linked to the stock market.
When you get a reverse mortgage, the value of your home is appraised, and you can borrow a percentage of that value. This value will not alter over the life of the loan in the most prevalent types of reverse mortgages. It’s even feasible to get more in loan payments than your home is worth if you choose to have the loan paid out in even installments and live a long period. Even so, you won’t owe anything extra to the reverse mortgage lender.
Reverse Mortgage and Annuity Summary
- In retirement, both reverse mortgages and annuities can provide a regular, predictable income source.
- An annuity can be purchased with a single payment or a series of regular payments.
- Your lender will eventually seek repayment of the money from a reverse mortgage, and most people will sell their home to do so.
- Both goods are complex and come in a variety of shapes and sizes. Annuities, in particular, can be tailored to meet a variety of needs. It is critical to comprehend either type of merchandise before purchasing it.
- If you can afford it, an annuity is a better option than a reverse mortgage: An annuity can provide consistent income without putting your house at danger.
Reverse Mortgage Closing Costs
When receiving a reverse mortgage, borrowers are needed to finance a number of closing costs. Each state has different fees for example see our closing costs in NC article to learn more for NC. Many consumers are unaware that some of the expenses change depending on the lender and the borrower’s location.
When considering a reverse mortgage, it is in your best interest to browse around and compare pricing. Origination fees and appraisal expenses are two of the most prevalent variable costs.
Rates influence the amount you can borrow as well as the amount of interest you’ll pay throughout the life of the loan.
If you have any other questions regarding Reverse Mortgages or Annuity contact the mortgage experts at 864-397-8500 or click Mortgage Rates Today!
Financial Consultant and Author