I’ve heard that reverse mortgages can help fund your retirement. How does that work?
Valerie RumboughA reverse mortgage is a loan against your home equity that you don’t have to pay back as long as you live in the home. The lender pays either a lump sum, a designated periodic payment for a definite period of time, or monthly income for your life. The amount you are able to receive is based on your home value, your age, and the prevailing interest rate.
Because of significant upfront costs, they are the most beneficial to someone who is much older than the minimum age of 62, plans to stay in the home for quite some time, and who owes very little on the home.
A reverse mortgage could possibly be set up to eliminate monthly mortgage payments if there is little equity in the home. There are no minimum income or other qualifications that have to be met. The lender is repaid at the time the home is sold. Any equity in the home over and above this amount belongs to the homeowner or his estate.
About 90 percent of all reverse mortgages are Home Equity Conversion Mortgages, which are insured by the Federal Housing Administration (FHA). You can find out more about them, and how to find a reverse mortgage lender in your area at http://www.hud.gov/groups/seniors.cfm. Click on “Reverse mortgages for seniors” under the “Stay in your home” section.
Reverse mortgages can be a way to meet a real need for senior adults. Be wary, however, of those “door to door” salespersons who offer them. Although some of the terms they offer may be more flexible, the cost could be much higher than FHA insured loans.
There are other considerations to be aware of also, such as the impact on Medicaid qualification, which could impact your decision. Be sure to do your “homework” before you borrow on your home.
Rumbough, CPA, CFP, is vice president of finance with the Baptist Foundation of South Carolina. If you would like more information concerning the above article or other matters, call 1-800-723-7242.
Editor’s note: In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purposes.