Reverse Annuity Mortgages: What Are They?
Reverse annuity mortgages are commonly called RAM’s for short. This type of investment is designed for those who are older and who are looking for a way to have an income over their retirement years. This is a mortgage, but the design of the mortgage is virtually in reverse of what is considered a traditional mortgage. Rather than making a monthly payment to pay down the mortgage, reverse annuity mortgages pay the homeowner a portion of the value of their home each month throughout the rest of their lives.
The use of reverse annuity mortgages is not for everyone, but for those with a home that is fully paid for, it can be a good way to fund at least some of the individual’s retirement costs. The homeowner enters into the reverse annuity mortgage agreement with the bank or other lender. The agreement stipulates the exact payment terms, but in short, the bank will pay out a specific amount of money on a lifelong basis at a fixed monthly rate. Other options are available such as a line of credit style of mortgage or one that pays out in lump sums.
In any case, the property is under a mortgage which means that the home’s value is backing the investment. The homeowner eventually will lose the home, but not until after they die. The homeowner gradually loses the equity in his or her home the longer that the payments continue and the longer they live. When the owner does die, reverse annuity mortgages allow the lender of the mortgage to obtain the ownership of the property that is used to secure it. This is done through legal title ownership. The lender then can sell the real estate to recoup costs and to pay off outstanding claims associated with the property.
It is possible for heirs of the property to reclaim the property, at the time of death, by securing a standard mortgage or repaying the debt owed through the loan. If this is not done within a specific amount of time, the lender claims ownership of the property and may keep it or sell it. In some cases, the children of the homeowner may enter into the reverse annuity mortgages with their aging parents. This allows for the parents to receive the monthly income payments which they can then invest in income yielding securities with. The child of the parents then benefits from the depreciation and other tax benefits of owning the real estate themselves.
It is important to know the ins and outs of reverse annuity mortgages before investing in them. In particular, this type of investment should be discussed with all family members to ensure that there are no problems down the road. Nevertheless, many homeowners enter into these reverse annuity mortgages as a way of making their lifelong income possible. The funds received may be used in any way that is deemed necessary by the homeowner. A variety of these mortgages exist through various lenders, through most are banks.