Are you worried that you’ll run out of money during your lifetime? Are you uneasy about the flat stock market and low interest rates? Would you like a source of guaranteed retirement income in addition to your Social Security benefit and pension? If you answered “yes” to any of these questions, a reverse mortgage is an option that may be suitable for you.
Your home is often your most valuable asset, but until recently, it was an illiquid asset (an asset that is difficult to sell because of its expense, lack of interested buyers or some other reason) and provided you with money only after it was sold. A reverse mortgage helps tackle this issue. Simply, a reverse mortgage allows older homeowners to convert the equity in their primary residence into a liquid asset, be it a stream of income, lump sum or for deferred use. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. Cash accessed through a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits, although it may affect eligibility for other government programs such as Medicaid.
To be eligible for a reverse mortgage, you must be at least 62 years old and must either own the home outright or use the proceeds of the reverse mortgage to pay off the balance of the existing mortgage. You retain ownership of the home, are responsible for its maintenance and continue to pay your property taxes and insurance.
Here’s a simple reverse mortgage example for a 65-year old couple. Let’s say they own a home valued at $250,000 and have completely paid it off. If they choose monthly lifetime payments, they would receive about $672 per month or $8,065 annually. Again, this is tax-free income.
Another option is to defer receiving any income and receiving interest on the amount they borrowed. If that couple did so, based on current interest rates, their account would be worth $193,500 in 10 years. This option would be suitable for someone who does not need immediate income but wants some assurance that there will be income for them in the future.
Reverse mortgages are complex financial instruments, and you must carefully weigh the pros and cons before applying for one. Below is a list of pros and cons from Investopedia, the world’s leading source of financial content on the web.
• You can often choose how the cash is paid to you: a single lump sum, a regular monthly cash advance, a line of credit where you decide when and how much of your available cash is paid to you, or a combination of these methods.
• Regardless of how the cash is paid out, you normally don’t have to pay anything back as long as you (or any co-owners) live in the home as a principal residence.
• There is no required minimum income to qualify (because you don’t have to make monthly repayments).
• If you receive more payments than your home is worth (i.e., you “outlive” the loan), you will not owe more than the value of the home, according to the Federal Trade Commission.
• Cash advances are typically non-taxable.
• You maintain the title to the home (you remain the owner).
• If you have a federally-insured Home Equity Conversion Mortgage (HECM), you can live in a nursing home for up to 12 months before the loan becomes due.
• Cash advances typically do not affect your Social Security or Medicare benefits.
• After the home is sold and the lender fees are paid, any equity left in the home goes to you or your heirs.
• You must be at least 62 to qualify.
• You must go through (and pay for) mandatory mortgage counseling.
• Loan origination fees and closing costs can be expensive (these fees can be rolled into the loan and financed).
• You may be charged monthly servicing fees during the term of the mortgage.
• Most reverse mortgages are variable interest rate loans tied to short-term indexes.
• Your debt increases over time as interest is added to the loan balance.
• You cannot deduct the interest until the loan is paid off.
• The loan can become due if you fail to pay taxes, homeowner’s insurance or other expenses.
• There are limits on how big a mortgage you can get, and how much you can borrow during the first year.
• Reverse mortgages use up equity in your home, leaving you and your heirs with fewer assets.
Before exploring a reverse mortgage, you need to ask yourself, “How much home equity do I have?” If the answer is “not much,” then you’d want to look into other options. However, if you’re of the right age without a lot of cash flows and sitting on substantial home equity, a reverse mortgage can be a sweet deal.
If you think you may need access to your equity, talk to a housing counselor or a trusted financial advisor sooner rather than later. A good financial plan created by an advisor keeps you from making hasty financial decisions in an emergency and is designed to give you options–like a reverse mortgage–in your retirement.