If you have a home that's paid off – or almost paid off – a reverse mortgage can help you live better by providing a steady stream of dependable income.
This type of mortgage is called a reverse mortgage because instead of you paying the lender a certain amount per month for a certain number of years, the lender pays you. These payments are cash advances against the value of your home.
There are different kinds of reverse mortgages, but all of them are similar in certain ways. You continue to own your home just as you do with a normal mortgage. You pay the property taxes and are responsible for maintenance, homeowners insurance and property repairs.
At the end of the mortgage, you or your heirs must pay all of your cash advances plus interest. If you or your heirs cannot do this, the lender can foreclose on your house.
There are financing fees associated with a reverse mortgage just like with a forward mortgage. The money you get form the reverse mortgage can be used to pay these fees. These costs are added to your loan balance and must be paid back with interest when the loan is over.
How much money can you get with a reverse mortgage?
The monthly amount you get will depend on your age and the value of your home. Here's an example. One reverse mortgage currently available is the Federally-insured Home Equity Conversion Mortgage or HECM. Assuming you have a home worth $200,000 and owe nothing on it, an HECM could get you $641 a month for the rest of your life. Alternately, you could get a credit line account in the amount of $107,466 that you then could draw from whenever you wished. Or you could choose to get a single lump sum payment for the same $107,466.
Keep in mind that, as a rule, reverse mortgages are first mortgages. In this case, if you still owe any money on your home, you must pay off the old mortgage first. If you don't have the money to do this, you can usually use money from the reverse mortgage to pay off the old debt.
How much will you or your heirs end up owing?
The debt will equal all the cash advances you have received, plus all interest that is added to your loan balance. If that amount is less than your home is worth, you or your heirs get to keep the difference. The other good news is that you can never end up owing more than your house is worth at the time the loan is repaid.
If you are “house rich” but “cash poor,” a reverse mortgage could help make your golden years more golden, However, make sure you read the loan papers carefully to be certain you understand all the loan's conditions.
Douglas Hanna is a retired marketing executive and the author of more than 100 articles on HD radio, the Internet and family finances.
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