Converting Home Equity Into Income for Retirement

by Barry Waxller

The reverse mortgage is getting a lot of play these days in the media, but what is it exactly? Let’s take a closer look at it and some of the issues that arise.

The reverse mortgage is exactly what it sounds like. Instead of you making payments to a lender, the lender makes payments to you. While that may sound fantastic, the similarities pretty much end there.

Equity. The reverse mortgage equity loan is all about equity. Every payment the lender makes to you is in exchange for a slice of the equity in your property. Unlike your traditional home loan, the balance due on the loan goes up.

The number one question regarding reverse mortgages has to do with equity. Specifically, what happens if the equity is all used up before the borrower dies or the home is sold? Do you lose the home, get foreclosed on or what?

This is exactly what happened when these loans were first offered. This unsavory result did not stand. The federal government got involved. In most current situations, you are allowed to remain in the home, but payments to you stop.

If you are going to be giving away equity, what size of payments can you expect? There is no simple answer. Factors such as the amount of the reverse mortgage, your age, costs and so on all go into the calculation of the payment amount.

If this sounds too vague to you, don’t worry. One of the biggest factors is the program you choose. There are different ones offering different payment amounts. You can even take lump sum payments in some cases.

What happens if you realize you should have gone in a different direction? Can you refinance your home to get out of the loan? Yes, so long as you pay off the amount due on the reverse mortgage. Make sure to check the fine print for prepayment penalties.

Another issue that arises is appreciation. What happens if your home appreciates over time? Can you get at the new equity? In most cases, you can. Whether this has to occur through a refinance or a modification to the reverse mortgage is a case by case decision.

What happens when I die? The reverse mortgage is handled no different than any of your other assets. It becomes due. This means your heirs must either pay it off or sell the property. If they sell the property, the reverse mortgage balance is paid off.

In some cases, the reverse mortgage makes sense. In others, it does not. The only way to make a determination is to discuss the details with a financial professional.

About the Author:

Barry Waxler is a financial advisor with UFCAmerica.com.