Much has been said and written about mortgages lately — about both how they work and how they contributed to the collapse of the U.S. financial system. One sometimes-overlooked variety of loan, the reverse mortgage, does not get nearly as much attention, but could be a crucial part of many Americans’ financial lives.
A reverse mortgage is a loan available to seniors financed by the value of their home. A reverse mortgage could be for you if you need an extra influx of money after retirement.
Is a Reverse Mortgage Right for You?
There are a few rigid guidelines that govern who is eligible for a reverse mortgage:
- You must be 62 years of age or older.
- You must own your home.
- You must have low or outstanding debt left on a low-interest mortgage.
Outside of those requirements, it’s pretty easy to qualify for a reverse mortgage. You won’t be screened for income, assets, employment or credit. Before borrowing, you would be required to get financial advice from a source approved by the U.S. Department of Housing and Urban Development (HUD).
Reverse mortgages are intended for seniors who want to supplement the income they receive from their retirement funds and social security. If you could use some extra funds after retirement, a reverse mortgage could warrant consideration. You should be sure, however, that you plan on living in the home for the life of the loan before you make the commitment.
How You Get Paid, How You Pay It Off
As with any loan, you will have to pay off your reverse mortgage. The difference is, you won’t be paying out of pocket.
Your payment to cover the loan — which you do not pay until you move out of the home or die — will come out of your home’s value, or home equity. If you are looking to move to a smaller home or just receive an income infusion, a reverse mortgage could turn your current home into funds. The amount you’ll be eligible to receive depends on where you live and how much your house is worth. This reverse mortgage calculator from AARP can help you get an idea of how much you can borrow.
You can choose to receive funds from your reverse mortgage in a few ways: A lump sum, as monthly cash advance, as a line of credit, or a combination of the three.
If you die before moving out of the home on which you have a reverse mortgage, your debt will not be passed on to your heirs. Instead, the money the sale of your house brings back on the market will be used to repay the loan.
Potential Cons of a Reverse Mortgage
As with almost any loan or financial move, there are several potential cons involved with taking out a reverse mortgage.
First, you’ll need to pay mortgage insurance, in addition to standard homeowners’ charges such as repairs and taxes. Second, there is a chance you will not receive all of your home equity through a mortgage if you die before full the loans are paid out. The interest on a reverse mortgage is tax deductible, but only after the loan is fully repaid. Finally, if you make too much money through your reverse mortgage, you could become ineligible for rewards such as Medicaid and supplemental Social Security benefits.
Other Home Equity Options
A reverse mortgage is not the only way to borrow money using the value of your home. A Home Equity Line of Credit (HELOC) is a loan in which you use the value of your home as collateral. You’ll have to pay interest — 4.32% is the current national average — but some banks offer substantially lower HELOC APRs. TD Bank is currently offering a pretty attractive deal: A relatively low 2.75% APR on HELOC for current TD Bank checking members. The TD Bank EquityAccess Plus deal also comes with a card you can use to earn rewards.
For official information on reverse mortgages from HUD, click here.