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If you don't have enough income to cover your living expenses in retirement, but you are a homeowner with a paid up mortgage (or a very small balance outstanding), there is a way to turn your home equity into income with a reverse mortgage.
A reverse mortgage is just what it sounds like: When you bought your home, you borrowed money and paid it back, making monthly payments, until the mortgage was paid. With a reverse mortgage, your home equity is paid back to YOU, with monthly payments, a single lump—sum payment or as an equity account that you can tap when you need it. The debt accumulates against the value of your home.
A reverse mortgage could be a way to boost your retirement income if you find yourself running short. Most reverse mortgages have provisions that protect you against losing your home as long as you maintain the property and pay property tax and utilities. So if you are in good health with a long life expectancy, a reverse mortgage may be an additional source of income. If your home increases in value over the years you continue to live in it, that counts in your favor. After you die or move out of the home, it will be sold, the debt repaid and any balance accrues to you or your heirs. Reverse mortgages include a "non recourse clause" to ensure that neither you nor your heirs can end up owing more than the value of your home when the loan is repaid.
You must be at least 62 years old, own your home outright or have a very low mortgage balance that can be paid off at the closing with proceeds from the reverse loan. And, you must continue to live in the home. Your home must be one of the following: a single family detached home, townhouse, or condominium or a two—to—four unit property that you own and occupy. The amount of money you can borrow depends on your age, the current interest rate environment and the appraised value of your home. Generally, the more valuable your home, the older you are and the lower the prevailing interest rates, the more money you can borrow.
Be very careful as there are different types of reverse mortgages. Some are offered by state and local government agencies and nonprofit organizations, including federally—insured reverse mortgages backed by the Department of Housing and Urban Development. Others are offered by private companies. Fees vary, so it's important to educate yourself about the different types of reverse mortgages and shop around. Lenders generally charge an origination fee and other closing costs and may also charge servicing fees during the term of the mortgage. For more information on reverse mortgages go to http://www.aarp.org/revmort/list, http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm or http://www.ftc.gov/bcp/menus/consumer/credit.shtm and click on "Mortgages & Your Home."
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.
The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.
