Sometimes life throws us curveballs, even in retirement. For example, if you planned your retirement years carefully only to have an emergency or not have enough money to keep up your lifestyle, you might wonder how you’ll get money.
You could sell your house, but then where will you live? If you plan to stay in your home through retirement, you can use your home as collateral and borrow a reverse mortgage.
What is a Reverse Mortgage?
As you might guess, a reverse mortgage works opposite a traditional mortgage. Instead of making monthly payments on the amount you borrowed, you receive payments from the bank. You choose the frequency of payments, either a lump sum, monthly payments, or a line of credit.
You don’t owe any payments on the reverse mortgage, and you can stay in the home. However, you must keep up with the home’s maintenance and pay the property taxes. The mortgage becomes due and payable in full when you sell the house or pass away. Along with the principal borrowed, you’ll also pay any accrued interest.
Who is Eligible for a Reverse Mortgage?
Both borrowers must be at least 62 years old to be eligible for a reverse mortgage. So, for example, if one spouse is 63 but the other is 61, only the 63-year-old spouse can be on the reverse mortgage.
Also, to be eligible, you should own the home without a mortgage, live in the home full-time, and prove you can afford the home’s upkeep, property taxes, and homeowner’s insurance. However, some lenders will approve a reverse mortgage with as little as 50 percent equity in the home.
How much can you Borrow?
How much you can borrow depends on your home’s value and your age. There’s no ‘set in stone’ maximum; however, most lenders don’t lend more than 65 percent of the home’s value.
The younger you are, the lower the loan amount you can borrow because you’ll be in the home longer. The longer you wait to use your home’s equity with a reverse mortgage, the more money you can take out of your home’s value.
How do you Qualify?
It’s pretty straightforward to apply for a reverse mortgage. Like a traditional mortgage, you must prove you can meet your financial obligations. In this case, however, you must prove you can afford the home’s upkeep, property taxes, and home insurance; there isn’t a payment to afford.
You must also promise to live in the home full-time. If you leave for an extended length or go into a nursing home, the loan becomes due and payable immediately. As long as you use the house as your primary residence hzand you meet the age requirements, you may qualify.
The final requirement is that you talk to a HUD-approved reverse mortgage counselor to ensure you understand the loan and its implications.
What are the Good and Bad Sides of the Reverse Mortgage?
All mortgage programs have pros and cons. Understanding the good and bad about a reverse mortgage can help you make the right decision.
Reverse Mortgage Pros
- You can supplement your retirement income without adding to your monthly financial obligations
- You can stay in your home
- The reverse mortgage funds aren’t taxed (they aren’t income)
- You will never owe more than the home is worth, even if your loan amount exceeds the home’s value
Reverse Mortgage Cons
- If you default on your taxes or the home’s upkeep, you could lose your home in foreclosure
- Your heirs won’t receive as much because they must pay off the mortgage balance before receiving any proceeds of the sale
- You don’t get the income tax deduction for the interest accrued on the loan until you pay the loan off
A reverse mortgage can be a great way to supplement your retirement income or help you in a crisis. However, the mortgage does use your home as collateral, so make sure you understand the implications of the loan. Also make sure that you can afford the upkeep and property taxes.
A reverse mortgage is best for people who plan to stay in the home as long as possible and want to use the equity they earned. With no payments due each month, it can be a great way to enjoy the investment you own.