Short on retirement income? Get a boost from your home
If your savings and pensions can't guarantee a comfortable retirement, you don't have to sell your home to raise the cash you need to live on.
A reverse mortgage might be the answer.
It's a simple way to use your home's equity to get guaranteed income with no restrictions on how you use the money, no obligation to pay it back while you're in your home and no risk of losing your home, no matter how long you live.
With a reverse mortgage, a lender allows you to borrow against the equity in your home.
You can collect the money as a lump sum, a fixed monthly payment, a line of credit or a combination of the three. Many homeowners take both a one-time payment to meet immediate expenses, such as medical bills, and put the remainder into a line of credit to be used as necessary.
Unlike a typical mortgage, you don't need any income to qualify for a reverse mortgage.
Even so, a reverse mortgage is still a loan -- with its own unique perils -- and should only be considered after you look at all your financial options.
To qualify for a reverse mortgage, you or your spouse must be at least 62 years old and owe little or nothing on your original mortgage.
Your loan amount will be based on your home's value, the current interest rate and the age of the youngest owner. Reverse-mortgage loan limits and most closing costs are government-regulated.
The Home Equity Conversion Mortgage, available in all 50 states, the District of Columbia and Puerto Rico, dominates the market with 95% of all reverse mortgages.
To qualify, any remaining balance on your mortgage must be low enough to be paid off at closing with proceeds from the loan. You must first discuss the FHA-insured program with an approved counselor.
The older you are, the more you can borrow. For example, at an interest rate of 6%, a 65-year-old with a $250,000 home could get a one-time payment of $129,925, while a 75-year-old homeowner could borrow $155,038 on the same home.
Your lender will require you to continue to pay all property taxes, carry hazard insurance and keep your home in good repair. If you don't fulfill these obligations, the lender may do so for you with your loan money. After all, your home is their collateral, and they want to protect its value.
This extra cash, however, comes with a significant price tag, both for you and your heirs.
The cost of a traditional reverse mortgage is often cited as one of the biggest drawbacks, and it can run as high as 6% of a home's value.
Expect to pay a 2% loan origination fee up to $6,000, 2% for mortgage insurance and 2% for closing costs.
Although these up-front fees are government-regulated and can be rolled into the loan, they can vary widely.
That's why it's wise to shop around for the best deal using as your guide the Total Annual Loan Cost disclosure that each lender must provide.
Or consider a new, less costly type of reverse mortgages called the Home Equity Conversion Mortgage Saver.
It won't allow you to borrow quite as much against your home, but the mortgage insurance premium is reduced from 2% to a negligible 0.01% of a home's value.
On a $200,000 home, that means paying $20 instead of $4,000 -- and that goes a long way toward eliminating any complaints about the fees.
When the homeowner dies or permanently moves, the lender will sell the home to recover the initial loan, plus interest charges.
If the lender paid the homeowner more than it can recoup from the sale, neither the borrower nor the heirs are responsible for the shortfall.
If, on the other hand, the home sells for more than is owed, the excess must be paid to the borrower or heirs. Any extra profit is not the lender's money to keep.
Should the owners' heirs wish to buy the house, they can pay the lender the balance owed and it is theirs.
Because a reverse mortgage erodes home equity, you may not have it to draw on for future emergencies, health care needs, home repairs or living expenses. State and local governments offer low-cost loans for specific needs, such as home repairs or property taxes, as well as property tax deferral and postponement programs. These may be far less expensive options than tapping into your home equity.
A reverse mortgage is a serious step that can significantly limit your financial options and the inheritance you will leave your heirs. Be sure to discuss this important decision with your family and a qualified reverse mortgage counselor before you commit.
For more information, visit the AARP publication "Reverse Mortgage Loans: Borrowing Against Your Home".