Reverse Mortgages: Flexible Tools to Access Equity

In the last several years, a great deal of homeowners have realized that their home equity is growing larger. As a result, they want to consider ways to utilize that equity as part of their overall financial resources for retirement and estate planning.

Of course, the Montgomery Adviser reports, a lot of homeowners opt to sell their homes and use fewer resources for housing, borrow against their home with various types of mortgage loans — or consider a relatively new option known as the reverse mortgage.

By using a reverse mortgage, homeowners can obtain money for any reason. Whether seeking money to finance a home improvement, pay off a current home loan, supplement retirement income, pay for health care, or other expenses, many older Americans are turning to reverse mortgages.

These home loans allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. In this case it functions contrarily to the traditional mortgage (hence the name).

As more baby boomers reach retirement age, this product will likely grow increasingly common and popular.

With regular mortgages, you make monthly payments to the lender. But in a reverse mortgage, you receive money from the lender and don’t have to pay anything back for as long as you live in your home. Instead, the loan must be repaid when you die, sell the home, or no longer make it your principal residence.

Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations.

So, what’s the catch? To many, a reverse loan sounds too good to be true. And it may be, depending on your situation. The big disadvantage of a reverse mortgage is the high closing costs — which is very problematic if you plan to stay in your home for a short period of time.

Generally speaking, if you don’t think that you will remain in the house for longer than five more years, a reverse mortgage might not be a wise retirement income planning strategy. You may wish to consider traditional home equity loans or other financial avenues entirely.

To qualify for most reverse mortgages, you must be at least 62 and actually living in your home. The proceeds of a reverse mortgage generally are tax-free, and most reverse mortgages have no income restrictions.

The older you are, the more cash you can get. And the more your home is worth, the more funds are available to you. Since this type of mortgage loan is secured only by the value of your home, most reverse mortgages limit your loan to about 60 percent of your home equity. Also, you will remain responsible for maintenance, insurance, and taxes on your home.