Make retirement more comfortable with a reverse mortgage

House on sheet of bills

If your savings and pensions don't guarantee a comfortable retirement, and extra cash could buy you peace of mind, a reverse mortgage might be the answer.

It's a simple way to use the equity you've built up in your home to get a guaranteed source of income with no restrictions on how the money is spent, no obligation to pay it back and no risk of losing your home, no matter how long you might live.

We don't think you should plan on a reverse mortgage as your primary source of retirement income. There are significant costs, and it's no substitute for a corporate or government retirement check and a well-funded 401(k) or IRA.

But a house you bought 10 or 20 years ago that has gone up substantially in price could be your most valuable asset no matter how diligently you may have planned and saved for retirement.

If you didn't diligently plan and save for retirement, you might find that 80% or 90% of your net worth is now tied up in your house.

Of course, you can always sell the house to get the money you need to live on.

But a reverse mortgage allows you to borrow against the equity in your home. You can collect the money as a monthly payment, a lump sum, through a line of credit -- the most popular choice -- or a combination of those three.

To qualify for a reverse mortgage:

Many homeowners take a lump sum payment to meet immediate expenses, such as medical bills or to pay off whatever balance they might have on their original mortgage. They put the rest into a line of credit to be used as they need it.

Take, for example, a 62-year-old woman with a $250,000 home in Bakersfield, Calif. She could get a one-time payment of $106,816, a line of credit, or $680 a month -- $8,160 a year -- for as long as she lived in the house. If she were 72 when she got the reverse mortgage, the one-time payment would be $134,147, or she could choose to collect $922 a month or $11,064 a year for as long as she lived there.

Using the above example, if the homeowner began receiving monthly payments at age 72, her payments (using the $134,147 she borrowed) would exceed that amount in slightly more than 12 years. But with a reverse mortgage, the payments would keep coming, no matter how long she stayed in the house -- even if she lived to be 100.

You will have to enter the year you were born, the value of the house, and your ZIP code. The calculator will also allow you to see how much better off you would be if you waited five or 10 years.

Although you, as a homeowner, can use funds from a reverse mortgage in any way you choose, there are three obligations attached to the mortgage. You must:

Lenders insist on these because the home is collateral for the loan, so they want its value to be protected.

When the homeowner dies or permanently moves into another facility, such as a retirement community or nursing home, the lender will sell the home to recover the initial loan, plus interest charges. If the payouts to the homeowner exceed the amount borrowed, neither the borrower nor the heirs are responsible for the shortfall. If the home is sold for more than is owed, the excess must be paid to the borrower or heirs. It is not the lender's money to keep.

If the heirs want to buy the house, they can pay the lender the amount owed, and it is theirs.

A reverse mortgage is a serious step and should not be entered into without consulting your family. In fact, if you apply for a government-backed FHA reverse mortgage, or Home Equity Conversion Mortgage (HECM) -- and that's what 90% of people do -- you will be required to attend a counseling session that details the reverse mortgage process. These sessions can often be conducted over the phone.

One of the major obstacles to obtaining a reverse mortgage is the expense, which is high. It can cost 6% of the value of the home, with a 2% loan origination fee, 2% for mortgage insurance and the final 2% for closing costs. These costs start accumulating interest as soon as the loan closes. And the interest rate is usually variable, so it could rise during the life of the loan. But those costs are expected to fall as more banks begin offering reverse mortgages.

The Department of Housing and Urban Development, which insures most reverse mortgages, is figuring out how to lower premiums and origination fees.

As opposed to a traditional mortgage, in which you pay down your debt and increase your equity, the reverse mortgage builds debt and decreases equity. This, however, does not affect the homeowner. It does make a difference to heirs who might receive little or no money when the house is sold.

Those opposing reverse mortgages cite agencies, both governmental and private, that could be a source of funds for seniors having trouble making ends meet. And if your home needs substantial repairs, a single-purpose loan could be the answer.