Reverse Mortgages: Are They For You?

In today’s economy, many older people have seen the value of their retirement funds decline substantially. Some are struggling to make ends meet, cannot afford their medication or are living on high interest credit card debt. If you are one of these people, there may be another solution.

If you and your spouse are 62 years old or older and have equity in your home, you may have the option of a reverse mortgage. A reverse mortgage allows you to tap into the equity in your home to pay off your home loan. This eliminates or reduces your monthly payments and gives you more income on a monthly basis to pay for your necessities. You will still need to pay your property taxes and insurance, but a reverse mortgage can eliminate the need to pay monthly principal on your loan.

If you are one of those lucky people who has equity in your home because you have lived there for a long time and did not refinance, and you need additional monthly income, then you may want to consider a reverse mortgage. Reverse mortgages are attractive to retired people on a fixed income who cannot afford to continue to make monthly payments.

Basically, with a reverse mortgage, the bank lends you money up front to pay off your mortgage. If you have equity left over after paying your mortgage, your lender might make monthly payments to you, offer you a lump sum, or set up a line of credit you can borrow against, if you need funds in the future. Be careful if you elect a lump sum that you invest this money wisely in safe investments, so that you protect the amount you have borrowed. You may also want to compare the interest rate paid by the lender on non-disbursed funds against the interest rate you can get on a lump sum.

With a reverse mortgage you can stay in your home until you die or move out, then the loan becomes due. If there is equity left in your house at that time, it will go to you or your heirs.

There are no income or employment requirements for reverse mortgages because they are designed for people at or near retirement. Closing costs and fees can be expensive, but can be rolled into the mortgage.

The amount you can borrow with a reverse mortgage depends on your age and the amount of equity in your home. For example, with $100,000 in equity at age 62 you could qualify for a $55,000 lump sum; at 72 for a $61,000 lump sum and at 82 for a $47,000 lump sum. For additional calculations go to www.aarp.org/revmort.

It is not advisable to use reverse mortgages early in retirement. They are best suited for older retirees who already have used up some of their retirement savings but have unused equity in their homes. If you use a reverse mortgage early in retirement, you may not have any funds available in later years and will no longer have the option of a reverse mortgage.