The economic recession that occurred in the wake of the 2008 financial crisis has hit retirees hard. To prevent a global financial collapse our government slashed interest rates. As a result, interest rates being paid on typical retiree investments such as CDs, bonds and money market accounts are at an all-time low. Retirees who depend on this income to pay their bills have few alternatives for safely replacing the income they have lost. One potential solution, the reverse mortgage, just got better. With a reverse mortgage, you’re taking a loan on your home whereby you can either receive a lump-sum, a line of credit, fixed monthly payments (ideal for retirement planning) or a combination of monthly payments and a line of credit.
Here’s a quick guide to using a reverse mortgage:
- You, and your co-owner if you have one, must be age 62 in order to qualify.
- The amount of money you can get depends on several factors including your age, the value of your home, and the current mortgage interest rates. A good rule of thumb is 50% to 60% of your home’s appraised value. An appraisal is required.
- If you choose to take your money in the form of a monthly income, the income will continue for as long as you remain in the home…even if that’s a really long time! This is one of the key benefits of a reverse mortgage. In effect, the risk of you living too long and therefore taking out more money than the value of the home is being born by the mortgage company. If, when you die or move out of the home, it is sold for less than the mortgage balance neither you nor your heirs owe anything! During the term of the reverse mortgage, you are not required to make any payments.
- Money coming from a reverse mortgage is not subject to income taxes and will not affect your Social Security.
- When you are no longer living in the home, the mortgage becomes due but you’re allowed ample time to sell. Once sold, the proceeds are used first to pay off the loan and any remaining equity is returned to you or your heirs.
- Reverse mortgages are governed by the Federal Housing Administration (FHA) and therefore there are no income or credit qualifications required.
- Interest rates on reverse mortgages are slightly higher than for a conventional mortgage but currently remain in the 5% range.
The new twist is that if you are willing to take 20% less than the loan you would normally qualify for, the FHA will waive the upfront insurance payment required at closing. On a home that appraised for $200,000 this would cut your closing costs by $4,000 according to Jim King, of McGowin & King Mortgage.
If you need more cash flow for your retirement and have a strong desire to stay in your home for as long as possible, the reverse mortgage is a strategy you should explore. As with any mortgage loan, you’ll want to shop around for the best pricing.