Reverse Mortgages: A Source of Retirement Income Worth Investigating

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Reverse Mortgages: A Source of Retirement Income Worth Investigating

Until about a decade ago, retirees desiring to convert equity in a home into cash could either sell the home or borrow against it. Now there’s a new financial technique. Reverse mortgages provide retirees with a third way of extracting money from a home—without having to move or make monthly loan payments.

TIP: Reverse mortgages generally make the most financial sense for retired homeowners who have high-value homes and who expect to outlive their life expectancies.

What Is A Reverse Mortgage?

A reverse mortgage is a loan against a residence that need not be repaid as long as the borrower lives in the residence. The proceeds of the loan can be paid to the borrower in a lump sum, in monthly or other periodic payments, or as a line of credit.

The loan proceeds must be repaid when the homeowner dies, sells the home, or moves.

Who Can Obtain A Reverse Mortgage?

Homeowners must be at least 62 years of age to be eligible for most reverse mortgages. To obtain a reverse mortgage, all owners of the home must undergo the application process and sign the note. The home must be the owners’ principal residence. Other than mobile homes and co-ops, most types of residences are eligible.

Reverse Mortgages Are Expensive

A major negative of reverse mortgages is that, because there are no monthly loan payments, the amount owed grows over time. Thus, the amount of equity that will remain after selling the home and paying off the loan diminishes over time. (However, the borrower cannot owe more than the home's value at the time of repayment.) Reverse mortgages are most costly in the early years of the loan and become less costly over time. The overall cost of borrowing can be very high in the short term, but less costly if the borrower lives beyond his life expectancy.

Who Offers Reverse Mortgages?

Reverse mortgages are offered by state and local governments or by banks, mortgage companies, and savings associations. Each type of program has various restrictions and limitations.

The amount of cash that home can generate under a reverse mortgage depends on your age, the home's value, the cost of the loan, and the loan program used.

TIP: Generally, the largest cash advances are obtained from the federally insured Home Equity Conversion Mortgage (HECM). This is usually the least costly of private sector reverse mortgage programs.

Conclusion

Because of the complex financial, estate planning, and income tax issues that can be involved in reverse mortgages, the advice of a professional is a must.