Financial Answer Center
- Introduction
- Reverse Mortgage
- Sale and Leaseback of Your Home
- Nonqualified Deferred Compensation Plans
- Income Deferral Programs
- Other Investments for Retirement
- Comparing Taxable and Tax-Exempt Yields
- Capital Gains Tax Rates
- Tax Rate on Dividends
- Comparing Tax-Advantaged Investing to Other Investing
- Investing in Growth Stocks or Growth Mutual Funds
This section applies to you if you are at least age 62.
A reverse mortgage or reverse annuity mortgage allows you to receive a stream of monthly payments or have a line of credit from a mortgage company. This option allows cash-strapped elderly homeowners the opportunity to use some or all of the equity in their homes while they are still alive.
How it Works
The bank uses your home as collateral and makes monthly payments to you or establishes a line of credit that you can draw upon. The payments to you are based on your age, the home's value, interest rates, and your marital status. Unlike a conventional loan, you don't have to make payments to the bank. Principal, interest, and fees simply accrue against the home's value and are paid when you sell your home.
Generally, to qualify for a reverse mortgage:
- You must be at least age 62
- If married, have a spouse who is at least age 62
- You must owe very little or nothing on your home
- You must agree to accept the terms of the mortgage
- You retain title to the home and full responsibility for its upkeep
IMPORTANT NOTE: Extreme caution should be exercised before implementing a reverse mortgage. Consider the following:
- There are fairly expensive upfront closing costs and possibly monthly service charges too. These costs can be included in the loan.
- For young retirees, the monthly checks are quite small.
- If you outlive the term of the loan, you may be forced to sell your home and move.
Once the reverse mortgage is in place, there are several different ways to tap into the money:
- A line of credit is created and the funds can be drawn upon as needed.
- A monthly payment is received by the borrower over a certain number of years.
- A monthly payment is received by the borrower as long as the borrower occupies the home.
SUGGESTION: Whichever reverse mortgage option you choose, you can change options if your circumstances should change.
After the borrower moves or dies, the home is sold and the accumulated debt plus interest and any other closing fees come due and are paid from the sale of the home.
In a nutshell, elderly homeowners who don't have much of a retirement fund can live off the equity in their home while continuing to live in the home.
