Do a Reverse Mortgage on You Home for Needed Income or Cash
By Shane Flait ©2008

For most people around retirement age, their home represents a big chunk of their assets. Unfortunately it’s just sitting there not being used – aside from a place for living.

But now, you can turn the equity in your house into a stream of income or a lump sum payment without incurring a current obligation to make pay-back payments. And you don’t have to pay it back until you stop using your house as your principal residence. You can use the money to supplement your retirement income, pay for health care, long term care, property taxes, payoff an existing mortgage, or simply gift money to your children.

You can do it with a ‘reverse mortgage’. A reverse mortgage allows you – if you’re at least 62 years old and own your house – to convert part of your house’s equity into tax-free money without selling your home, giving up title to it, or taking on monthly mortgage payments. You can qualify on single family homes, condos, and townhouses.

Reverse mortgage programs[1] allow homeowners over 62 to convert part of their home equity into tax-free income without having to sell their home, give up title to it, or take on a monthly mortgage payment. They’re just responsible for keeping up payments on homeowner’s insurance and property taxes. Typically, with a reverse mortgage, more of your home’s equity is available the older you are when you apply for it.

You can receive this money either as a series of fixed monthly payments made to you for a fixed term or until you die. Or take it as line of credit or a lump sum. The amount of reverse money you can get increases with your age, the value of your house, and lower prevailing interest rates.

 

Most of the cash from the various plans has been used for home modifications, home repairs, to weatherize homes, to make homes accessible for the handicapped and for supplemental retirement income. But increasingly some of the money is being used to fund long-term care services.

 

Although you can use your reverse mortgage money to pay directly for long term care, you may get more “mileage” out of the money by purchasing long-term care insurance if you’re insurable.

 

You can purchase a long-term care insurance policy outright by paying a monthly, semi-annual or annual premium. Options you may consider are:

 

·         Take the reverse mortgage as a line of credit and then use the interest growth each year to pay long-term care insurance premiums.

 

·         Take a lump-sum obtained from a reverse mortgage to purchase a single-pay, long-term care insurance plan that’s available in some states;  or take an annuity which can then be set up to pay the LTC insurance premiums for the rest of the insured’s life. Or,

 

·         Use the lump sum to purchase a life insurance or annuity long-term care policy that pays LTC expenses with a guaranteed premium.

Some words of Caution

But be aware that the upfront costs associated with a reverse mortgage, such as an origination fee, closing costs and mortgage insurance premium can be significant. This means that a reverse mortgage may be expensive if the loan is repaid within a few years of closing. As a result, if you anticipate moving within a few years, you should explore another alternative, such as a home equity loan.

And realize that you’re still mortgaging your home in a reverse mortgage. Each payment you receive increases both the principal and interest you’ll eventually owe on the mortgage. And therefore it reduces the equity in your house.

 

When to you pay it back?

The loan (which is what the ‘reverse mortgage’ is) comes due only when you stop using your home as your principal residence. At that time you, your heirs or your estate can pay back the reverse mortgage amount with or without the sale of your home.

Your repayment obligation cannot exceed the home’s value or sales price. And if your home is eventually sold and the sales proceeds exceed the reverse mortgage loan amount, then you or your estate gets the excess.

Consider an example:

Suppose you’re making payments on a current $75,000 mortgage. You can pay this off and have more income to use if your house has increased in value enough. If so, you may be able to get $125,000 under a reverse mortgage. With this you pay off the $75,000 mortgage and receive the remaining $50,000 in any of ways suggested above.

As an alternative, you could sell your house and buy down to a less expensive house and use this difference for what you want.  But the reverse mortgage keeps you in the home you’re used to with title in your name.

 

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com

 

 

---

[1] Source: Income of the Aged Chartbook, Social Security Administration –released Sept 2006