As you transition to retirement, a home that is paid off can provide tremendous security for seniors. A reverse mortgage is one tool that will allow you to access the value of equity in your home even as you live in it.
Seniors frequently struggle to make ends meet during retirement. A reverse mortgage is a tool that can help well-situated homeowners get through a bit more comfortably.
Here are some things to know before you proceed:
A reverse mortgage is what it sounds like; it is a mortgage that pays you instead of one that you pay. Like a mortgage, a reverse mortgage is a loan against the value of your home.
There are four alternatives for receiving money from a reverse mortgage. You may receive a fixed amount each month for the rest of your life, a fixed amount each month for a period of years, a line of credit or a combination of a line of credit with a fixed payment either for life or for a fixed term.
It is important to understand that while the cash won’t come out of your pockets, a reverse mortgage is expensive, easily costing $10,000 to originate.
Because you don’t repay this loan from current or future income, you don’t need income to qualify. Your home’s value will be used to repay the loan.
If you take out a reverse mortgage you can never be forced from your home due to your payments; you are required to maintain the home in good condition, pay the taxes and keep the property insured. Failure to do those things could cause you to be forced out.
6. Fraud and Abuse
There is some fraud and abuse in the industry. You should never agree to a reverse mortgage under pressure. Do not agree to a reverse mortgage to pay for home improvements, especially if it is for home improvements you are being sold and did not seek.
The Department of Housing and Urban Development offers a reverse mortgage program called the Home Equity Conversion Mortgage for Seniors (HECM). This Federal program is a safer way to approach a reverse mortgage to prevent being cheated.
Your reverse mortgage will be paid from the sale of your home either when you die or when you move out of the home. You or your heirs will be entitled to receive any remaining equity in the home.
You can cancel your loan within three days following the completion of the paperwork, if you change your mind, with no penalty.
For seniors who own their home with little or no debt, a reverse mortgage can provide some helpful cash flow. This works especially well while you are healthy enough to live in your own home.
For many homeowners with modest dwellings, the cash provided each month would be modest and the fees expensive. It may be more desirable to stay in your home as long as your resources allow and then, subsequently, to sell your home and rent a retirement friendly apartment suited to your age and health using the proceeds from the sale of your home.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.