Many people haven’t saved enough to cover 10, 20, 30 or especially 40 years of retirement expenses, but many have one major asset: a home. If you’re a homeowner and at least 62 years old, you may be able to convert your home equity into cash using a reverse mortgage, a financial product that allows you to borrow against the equity in your home to get a fixed monthly payment or a line of credit.
Interest accrues on the payments you receive, and repayment is deferred until you become delinquent on your taxes and/or property insurance, the house falls into disrepair, you move, you sell the house or you pass away.
If you are looking for a source of long-term income to cover basic living expenses, medical care and other retirement expenses, a reverse mortgage might be a good option. Here’s a quick look at how to retire with a reverse mortgage.
1. First, make sure you’re eligible.
To receive a reverse mortgage, you must meet certain requirements:
Be at least 62 years old.
Own your own home.
Live in the home as your primary residence, and
Have substantial equity in the home.
Note: eligible property types include single-family homes, manufactured homes (built after June, 1976), condominiums, townhouses, and two-to-four unit homes (as long as you occupy at least one of the units).
2. Compare loan types.
There are different types of reverse mortgages, but the Home Equity Conversion Mortgage (HECM) is the most common. HECM loans are issued by private banks and insured by the Federal Housing Administration (HECMs are the only reverse mortgage products with a government guarantee).
There are no income limitations or medical requirements, although you must not be delinquent on any federal debt and have the resources to pay ongoing property charges, such as taxes and insurance. There are also no restrictions on how the money can be spent, so you can use it to supplement your income, pay for medical care, a home remodel, or anything else. One drawback is that the maximum loan amount is limited to the lesser of the home’s appraised value, sales price or the HECM FHA mortgage limit of $625,500.
Non-HECM loans are also available from various lending institutions. These loans are available in amounts that are higher than HECM loans. However, these mortgages are not federally insured and can be considerably more expensive than HECM loans. Few non-HECM loans are made, and usually only to very high-value homes.
3. Choose your payment option.
You have several options for how you receive the money from a reverse mortgage. You can select:
A lump sum – you receive a lump sum of cash at closing;
A monthly “term” option – you receive fixed monthly payments for a set period of time;
A monthly “tenure” option – you receive fixed monthly payments for as long as you live in your home;
A line of credit – you make withdrawals on a cash-needed basis, until you have used up the line of credit; or
A combination of monthly payments and a line of credit.
Don’t worry if your needs change over time. You should be able to change your payment option at any time for a small fee, as long as you haven’t drawn all the funds already. Check with your lender to make sure you’ll be able to make changes.
4. Shop around.
Reverse mortgages are offered by numerous lending institutions. While the mortgage insurance premium (MIP) will be the same at any lender, other costs, including the origination fee, closing costs, servicing fee and interest rate (all of which can be substantial) will vary among lenders. The age of the youngest person listed on the mortgage (a couple may list both names) will also affect how much money you will be offered.
It pays to shop around and compare the terms presented by the various lenders. Keep in mind that you don’t have to purchase any other products or services to get a reverse mortgage (with the exception of property insurance). Be wary of anyone who tries to pressure you into buying other financial products, such as annuities or long-term care insurance.
5. Consider Medicaid and Supplemental Security Income.
Social Security and Medicare benefits are not affected by reverse mortgages. If you have – or are planning to apply for – Medicaid or Supplemental Security Income, however, it’s important to note that any funds you retain count as an asset, which could make you ineligible for these benefits. It is generally recommended that you use any reverse mortgage proceeds immediately to avoid any potential problems.
6. Review with an attorney before signing.
In addition, if you're married, be sure to talk through the implications of what happens to the surviving spouse when one of you dies. It is generally simpler to have both names on the mortgage, but this won't be permitted if a younger spouse is less than 62 years old when the mortgage is taken out. Even if both spouses are at least 62, be wary of taking out the mortgage only in the name of the older spouse (to obtain more money). If the younger spouse is the survivor and does not have his/her name on the document, staying in the home could be difficult.
The Bottom Line
A reverse mortgage is a major financial decision that requires careful consideration. In addition to the substantial costs involved, it’s important to remember that your debt increases over time due to the interest on the loan.
Reverse mortgages are “nonrecourse” loans, meaning that you (or your estate) will never owe more than the home’s value (even if the loan exceeds this value).However, depending on the size of the loan and the property’s value, there may be little left for you and/or your heirs after the loan is repaid.
To learn more about this type of mortgage, see The Reverse Mortgage: A Retirement Tool. To review alternatives, look at Reverse Mortgage Or Home-Equity Loan? and Is Relying On Home Equity For Retirement A Good Idea?
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