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Reverse Mortgages

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There are other ways to obtain retirement income beside retirement investment accounts. A reverse mortgage is a special type of loan designed for the elderly to allow them to cash out the equity they may have built up in their homes. Instead of selling their home or taking out an equity loan, elders can use a reverse mortgage to get access to their equity but continue to own their homes. Under a special arrangement, the lender will make payments to them. Not everyone is a good candidate for a reverse mortgage, however, and there are stipulations:

  • The homeowner applying for a reverse mortgage loan must be 62 years old or older.
  • Before the application can be approved, the homeowner is required to attend HUD approved counseling.

If a reverse mortgage is approved, there are a number of payment options for the homeowner, who can choose to receive monthly payments, a lump sum distribution, or access to a line of credit. The homeowner generally will not have to make any payments to the lender as long as he or she lives in the home. Taxes, insurance, repairs, etc. will remain the responsibility of the homeowner, however. If the homeowner moves, the home can be sold to pay off the loan.

A reverse mortgage is not for everyone. Anyone planning on leaving their home to family members is not a good candidate as the lender of a reverse mortgage essentially assumes ownership of the home once the agreement is signed. Additionally, the fees for a reverse mortgage can be quite high and are usually significantly higher than the costs associated with a conventional mortgage. These fees are usually rolled into the body of the loan however. There may also be tax consequences of entering a reverse mortgage agreement, so be sure to seek the advice of a tax professional.

Reverse mortgages are generally regarded as a last resort option for people who have no other means of supporting themselves in retirement. For many low and middle-income families, a home is the only means of transferring wealth from one generation to the next. A reverse mortgage eliminates this option, so be sure to explore all other avenues for generating retirement income before entering into a reverse mortgage agreement.