Many lenders now offer so-called "reverse mortgages" as a way for seniors to cash in on their home equity. These loans may also be called lifetime or reverse annuity mortgages.
What is a reverse mortgage?
Just what is a reverse mortgage? Essentially, it's a loan where you borrow against your home in installments. Each month you receive a payment representing loan proceeds, and the loan gets bigger instead of smaller -- a "reverse mortgage." For homeowners with paid-for homes but little cash, reverse mortgages can provide the money needed for property taxes and other home expenses that might otherwise force them to sell their homes.
The older you are and the higher the value of your home, the bigger the reverse mortgage monthly payment for which you can qualify. Generally, you must be at least age 62 to apply. The loan is repaid (usually by selling your home) when you die, move out, or at the end of a set term.
Most people want an open-ended (also called life tenure) loan term. Under this arrangement, you get monthly checks until you die or move out of your home. If the loan is insured privately or through the FHA, you keep getting checks even after your home's value is less than the loan amount. And it should not be your (or your heirs') responsibility to make up the shortfall. That's what the insurance is for. Because you still own your home, you still pay the property taxes, insurance, and upkeep.
The reverse mortgage payments are not taxable, and they don't count as income for social security eligibility purposes. When the loan is repaid, any interest paid is then deductible.
Watch the cost
Unfortunately, reverse mortgages are expensive. You can expect upfront fees of $5,000 or more on a $100,000 reverse mortgage, plus you'll pay monthly service charges and mortgage insurance premiums. Also, the power of compound interest works against you. Often the amount owed at the end will dwarf the cash actually received. Avoid loans where the lender keeps all the home price appreciation that occurs after you make the deal.
If you're interested, shop for a reverse mortgage as you would for any other loan. Make sure the basic terms of competing loans are comparable. Then go with the lowest price by comparing interest rates, upfront fees, and other charges
© Copyright 2000 Raymond S. Kulzick. All rights reserved. 000905.
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