If you’re a senior who is 62 years or older, have you heard about how a reverse mortgage might be able to help you during retirement? A reverse mortgage can convert your home’s current equity into cash.
Reverse mortgages sometimes get a bad rap, but they can be a very useful tool in your retirement and investment arsenal. They can supplement your income and assets and prevent you from depleting your other investments.
How Do Reverse Mortgages Work?
With a standard mortgage, you pay the lender every month. With a reverse mortgage, the lender pays you. Like I mentioned earlier, the lender takes part of the equity you have in your home. Then the lender converts that equity into payments that go straight to you. Think of it as a pre-payment payment on your home’s equity.
This cash can be used to eliminate your existing monthly mortgage payments. It can also provide you with additional cash or a monthly income. In some circumstances, a reverse mortgage can even be used to help you purchase a new home.
Benefits of a Reverse Mortgage
Reverse mortgages have many benefits, but here are a few of the best. If used correctly, a reverse mortgage can help you make the most of your money during retirement. (As always, please consult with a financial advisor about retirement matters.)
Tax-Free Proceeds: Any money you get from a reverse mortgage can be used however you want, and you won’t ever be taxed on it.
Payout Options: You can receive reverse mortgage funds as a lump sum, a lifetime monthly payment, or a line of credit that grows over time. You can also choose a combination of these payment options, depending on your financial needs and goals.
Retirement Security: If you need to supplement your income, your home’s equity may be able to give you the money you need right now. A reverse mortgage is a retirement tool that gives you the freedom to use your retirement savings and investments in the way that is best for you.
Home Ownership Doesn’t Change: With a reverse mortgage, you will continue to live in and retain ownership of your home. Since ownership doesn’t change, you can still leave the home to your heirs (though they will be required to pay the balance on the home).
Non-Recourse Loan: FHA reverse mortgages are non-recourse loans. This means that if the loan exceeds your home’s value, neither you nor your heirs will ever pay more than the home is worth. Additionally, neither your assets nor those of your family are collateral for the loan.
No Payments: There are never any mortgage payments with a reverse mortgage. The loan balance isn’t due until the last borrower permanently leaves the home. The balance of the loan is due when you die, sell, or move out.
Two Types of Reverse Mortgages
There are two different types of reverse mortgages. You have the option to refinance the home you’re currently in, or you can use a reverse mortgage to buy a new home altogether.
Refinance Reverse Mortgage
You need to have substantial equity in your home to do a reverse mortgage refinance because you’re borrowing against your home’s equity. After you pay off any existing mortgages or liens, your proceeds can be taken in a lump sum, as a lifetime monthly payment, or as a line of credit you can tap when needed. With the line of credit option, your available credit actually grows each month you have not used it. Once the reverse mortgage is complete, you won’t have any mortgage payments for the remainder of the time you stay in the home.
Let’s say that a retired couple wants to increase their monthly income but doesn’t want to take more money out of their retirement account. Their home’s value is currently $400,000, but they still owe $40,000 on their mortgage. Here is a breakdown of the couple’s reverse mortgage proceeds:
Home value: $400,000
Allowable Loan amount: $300,000
Closing costs: -$8,000
Current mortgage -$40,000
Net proceeds: $252,000
*Example only—the actual amount varies by county and individual qualifications.
Purchase Reverse Mortgage
If you want to move to a new home, a purchase reverse mortgage may work for you. This option allows you to buy a new home at a purchase price above your available down payment without having to make mortgage payments. You must have a significant down payment for a reverse mortgage purchase. Generally, you will need to put down between 25% and 50% of the new home’s purchase price depending on the youngest borrower’s age.
Funds for the new home’s down payment may come from the sale of your old home, gift money, your personal savings, or other acceptable sources. These are combined with the reverse mortgage proceeds to make up the full purchase price of your new home. The biggest advantage of this type of reverse mortgage is that you will not have a mortgage payment on the new home, even though your down payment is less than the home’s price.
Shopping for a Reverse Mortgage
If you’re thinking about a reverse mortgage, think about which type might be right for you. Often, this depends heavily on what you want to do with the money. You should compare options, terms, and fees, and learn as much as you can about reverse mortgages. You should also talk with a financial advisor. Of course, I’m always happy to talk with you about what might work best for your situation, as well.