Reverse Mortgage vs. Annuity: An Overview

Reverse mortgages and annuities are financial products that are generally used to help investors generate a steady, reliable retirement income stream. Despite having ඣa similar intended purpose, these two financial products are different.

A reverse mortgage i💎s a loan that uses the value of your home as security. An annuity, on the other hand, is a type of insurance that may require a substantial amount of upfront cash to purchase a contract. Since reverse mortgages use your home as collateral, they are generally riskier than annuities, which you fund.

Reverse Mortgage

A 澳洲幸运5开奖号码历史查询:reverse mortgage is a loan available to qualifying homeowners 62 and older who have considerable equity in their homes. With a reverse mortgage, you use the money you’ve invested in your home. The value of your property is 澳洲幸运5开奖号码历史查询:appraised, allowing you to borrow a certain percentage of this value. This value doesn't change over the lifetime of the loan for most types of reverse mortgages.

Since it is a loan, you don't have to fund a reverse mortgage yourself. If approved, the lender can issue the funds as a 澳洲幸运5开奖号码历史查询:lump-sum payment, a line of💧 credit, or as fixed monthly payments. If you choose this last amount and live a long time, you may be able to receive more in loan payments than your home is worth. Even ꧒in this case, you won’t owe the reverse mortgage lender anything extra.

Your reverse mortgage becomes due when you die, move away, or sell your home. In any of these cases, you must pay the loan back. This makes a reverse mortgage a bad option for people 澳洲幸运5开奖号码历史查询:wh🦹o want to pass on their house to their heirs. That is, unless there is an eligible non-borrowing spouse living in the home or if your spouse is on the reverse mortgage and is still in the home.

There are a few risks to keep in mind when it comes to this financial product. Among th🎶e most comm﷽on:

• 澳洲幸运5开奖号码历史查询:You run the risk♈ of losing your home with a reverse mortgage. The residency rules for reverse mortgages state that if you are away from home for more than a year, even to go to a hospital, the lender can 澳洲幸运5开奖号码历史查询:foreclose on the loan. This means that you might have to sell your house to repay the loan.
• Be careful when researching reverse mortgages. Aside from the 澳洲幸运5开奖号码历史查询:potential for scams targeting the elderly, reverse mortgages have some legitimate risks. Despite recent reforms, there are still situations when a 澳洲幸运5开奖号码历史查询:widow or w♚idower could lose the home upon their spouse’s death.

Types of Reverse Mortgages

There are three types of reverse mortgages that are available to homeowners. The most common is the 澳洲幸运5开奖号码历史查询:home equity conversi🐼on mortgage (HECM). Backed by the federal government, this type of reverse mortgage is guaranteed by the U.S. Department of Housing and Urban D🔜eꦿvelopment (HUD). Unlike other types of reverse mortgages, there are no income thresholds but the upfront costs tend to be higher. The limit for 2025 for this type of reverse mortgage is about $1.2 million.

Another type of reverse mortgage is offered by local and state governments as well as some nonprofits. It's called the 澳洲幸运5开奖号码历史查询:single-purpose reverse mortgage and it is the least common. As the name implies, the way a homeowner can 👍use this type of reverse mortgage is usually restricted by the🥂 lender. The costs associated with single-purpose reverse mortgages tend to be lower than others.

Private lenders also issue reverse mortgages. These are called 澳洲幸运5开奖号码历史查询:proprietary reverse mortgages. Appraisals with these loans typically result in higher values, which can offer higher loan values. This is why some borrowers opt for this type of reverse mortgage. Since they are issued by private lenders, these loans aren't federally insured. Borrowers aren't required to take out 澳洲幸运5开奖号码历史查询:private mortgage insurance (PMI) but may be respo🍷🎶nsible for higher fees and interest.

Annuity

An annuity is a form of 澳洲幸运5开奖号码历史查询:insurance. An annuity is an agreement wherein you invest a certain amount of money either as a lump-sum payment or through fixed installments with a company in exchange for a payout stream in the future. The contract exists between the issuer, which is the party that offers the contract, and the 澳洲幸运5开奖号码历史查询:annuitant or the insured party.

Annuities are often deemed to be supplements to retirement income. As such, investors commonly hold them in addition to other investments in their 澳洲幸运5开奖号码历史查询:portfolios, which may include stocks, bonds, mutual funds, insurance policies, 澳洲幸运5开奖号码历史查询:certificates of deposit (CDs), and cash.

The payout for an annuity is usually made by the issuer in fixed monthly payments. This amount is calculated based on the annuitant's age and 澳洲幸运5开奖号码历史查询:life expectancy. In some cases, any remaining funds can be paid out to their beneficiaries or heirs if the annuitant dies before the annuity is paid out.

Most people take out an annuity to reduce their financial risk. It can provide you with a guaranteed income stream for retirement and protect you against stock market and house price fluctuations.

Types of Annuities

There are many types of annuities. The following tabl🧸e highlights some of the most common types of annuities and their characteristics.♕ All of these allow investors to take lump sum or fixed installment payouts.

Key Differences

Returns

If you want to🀅 use either of these products to provide yourself with a stream of income in retirement, you should also compare the return each will generate for you. 

When it comes to reverse mortgages, you should remember that you are unlikely to make a profit. The money paid to you as either a lump sum or a monthly stipend is your money in the first place. Unless you live much longer than the bank expects, they are unlikely to pay out more than they will receive when the loan becomes due.

Unfortunately, this is an area in which it is difficult to give general recommendations for annuities. As noted above, there are many different types, each paying out differently. As such, there is no typical return rate on the money you invest in one. You should 澳洲幸运5开奖号码历史查询:shop around and pay particular attention to the fees associated with any annuity you are considering—high charges will significantly reduce your benefit.

Fees

When calculating the return you will get from either a reverse moꦅrtgage or an annuity, you also should be wary of fees. Again, these vary too much across lenders and products to be able to say that either type of🐲 product has higher fees. But keep in mind that the vast majority of lenders will charge fees for either product and that these can be steep.

The costs you will pay to take out a reverse mortgage can be very high compared to other forms of borrowing against your 澳洲幸运5开奖号码历史查询:home equity. Borrowers must pay an 澳洲幸运5开奖号码历史查询:origination fee, an 澳洲幸运5开奖号码历史查询:up-front mortgage insurance premium, ongoing MIPs (for certain types), loan servicing fees, and interest. The federal government limits how much lenders can charge for these items, but the origination fee, in particular, can be high—it’s capped at $6,000.

These fees might not be immediately obvious to seniors co✃ntemplating a reverse mortgage because they are often paid from the money you borrow. This means that you won’t necessarily receive the money and 𒊎then have to pay it to the lender, which can hide the fact that you are paying it. In practice, this process means that fees and interest are taken out of your home equity.

For annuities, these fees come in many forms. Many annuities have a 澳洲幸运5开奖号码历史查询:surrender period during which an investor 澳洲幸ꦯ运5开奖号码历史查询⛄:can’t withdraw funds without paying a penalty. The surrender fee is a cost to you that is paid if you withdraw your funds early. In some cases, there are also fees paid yearly to the company, and there could be up-front fees that the company will charge.

Tax Implications

When it comes to reverse mortgages, the money you receive isn’t taxed. But that’s because it’s already your money. The idea of a tax-free income is often mentioned in reverse mortgage advertising as a benefit of these loans. But you should remember that you already paid tax on this money when you earned it and that it’s not income. Instead, these payments are an advance on the money that your lender will get back when the loan becomes due.

Annuities offer several tax benefits, including a reduced tax bill. Your earnings generally grow on a 澳洲幸运5开奖号码历史查询:tax-deferred basis during the accumulation phase of your annuity contract. You pay taxes only when you start taking withdrawals from the annuity. These are taxed at the same tax rate as your ordinary income. If you fund an annuity through an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA) or another 澳洲幸运5开奖号码历史查询:tax-advantaged retirement plan, you also may be entitled to a tax deduction for your contribution. This is known as a 澳洲幸运5开奖号码历史查询:qualified annuity.

The Bottom Line

Both reverse mortgages and annuities are strategies that can be used to provide a steady, reliable stream of inco♏me during retirement. However, the two methods have some fundamenta🌞l differences.

You put money up front—either as a lump sum or a series of regular payments—into an annuity. In contr🧸ast, a reverse mortgage is a loan based on the equity built up in your home that your lender eventually will demand to be repaid. Most people will sell thei♏r houses to do so.

Both products are complicated and come in many forms. Annuities, in particular, can be customized with a wide range of options. It’s important to understand either type of product before you buy it. However, if you have the money to afford an annuity, you should generally choose one over a reverse mortgage—an annuity will provide a reliable income without the risk of losing your home.