IQ Fifty Plus Guide

Retirement Planning

Financial Planning and Saving for Retirement

What about Reverse Mortgages for Financing Retirement?

For many people approaching retirement, their major financial asset is the equity in the home they own. One way to tap that equity if needed is to sell the home and downsize to a smaller home or rent. When individuals wish to stay in their home but need to tap their equity without having monthly loan payments, a reverse mortgage may be a sound option in the right circumstances. For most individuals, this option should probably be a last resort, but you will certainly want to be informed about the options as you plan.

To help you make an informed decision about reverse mortgages and other alternatives, the AARP Foundation has produced the booklet Home Made Money: A Consumer's Guide to Reverse Mortgages. You can download the booklet in PDF form from the AARP site.

A reverse mortgage is a loan in which you receive money from a lender that doesn't have to be paid back until you sell your home, you move out permanently, or you die.

There are 3 types of reverse mortgage:

Federally-insured reverse mortgages, also know as Home Equity Conversion Mortgages (HECMs), are backed by the U.S. Department of Housing and Urban Development (HUD).
Proprietary reverse mortgages are private loans that are backed by the companies that develop them.
Single-purpose reverse mortgages are offered by some state and local government agencies and non-profit organizations. These are not available everywhere. They can only be used for the one specific purpose specified by the lender. Examples of such specific purposes include to pay property taxes or to finance home repairs or improvements. This type of reverse mortgage is primarily for low or moderate income homeowners.

You may have a choice in how you receive the money from a reverse mortgage. Generally speaking, you will have one or more of the following choices:

Receive it all at once in a single lump sum of cash.
Receive it as a fixed monthly cash advance for a specific amount of time or for as long as you live in your home.
Receive is as a line of credit which allows you to decide how much you need and withdraw it when you need it.
Receive it as a combination of these.

Here are some of the other things you need to know about reverse mortgages. Be sure to check them out thoroughly before agreeing to terms.

Reverse mortgages can have origination fees and other closing fees. There may also be servicing fees during the term of the mortgage. These fees and costs are usually set by the lender.
The amount of the reverse mortgage grows. Interest is charged monthly on the outstanding balance and is added to what is owed.
Most interest rates are variable and will likely change.
You are still responsible for property taxes, insurance, maintenance, and any other expenses. If you don't keep up with these the loan may become due and have to be repaid.
The interest is not deductible on income tax returns until the loan is paid off.
The loan advances are not taxable.
Even though most reverse mortgages don't affect your Social Security or Medicare benefits, it may affect your eligibility for certain "need based" benefits such as Medicaid.
Reverse mortgages can cost more to set up than other types of loans.

The following resources provide additional information about reverse mortgages.

Reverse Mortgages: Get the Facts Before Cashing In On Your Home's Equity from the Federal Trade Commission provides some tips and cautions for what’s sound and what may be potential dangers to your finances in reverse mortgage options.

The Reverse Mortgages pages from AARP present a series of articles that cover the basics and many other issues related to reverse mortgages. This is a good place to begin educating yourself. For more in-depth information, download AARP’s 51-page booklet, Home Made Money: A Consumer’s Guide to Reverse Mortgages (a pdf file).

Guarding the Golden Years: Reverse Mortgages from Consumers Union offers a brief overview and a checklist to help you determine when a reverse mortgage might be good and when not.

At reversemortgage.org you’ll find consumer material on different types of reverse mortgages prepared by the National Reverse Mortgage Lenders Association, an industry trade group. The site is informative, but keep in mind that it is presented from the lenders’ point-of-view and with marketing as one objective.

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