As many of us approach retirement, we look forward to the free time but worry about the lack of income. If you’re at least 62 years old, there’s cause for celebration: if you own your house outright, you can borrow against it and never have to pay back the loan. It’s called a reverse mortgage.
A reverse mortgage allows you to convert some of your home’s equity into cash, but unlike traditional mortgages, the loan does not have to be repaid unless you move or pass away (or somehow fail to meet the obligations of the mortgage).
If your Social Security check isn’t enough and you own your home free and clear, this could be a good option for you. To be eligible, you must live in your home. The downside on reverse mortgages is that the interest rates tend to be a little higher than they are for conventional mortgages, but the upside is that you get the cash you need to live a more comfortable life, either in a lump sum payment or via monthly payments (or a combination). In fact, if you almost own your home free and clear, you can complete a reverse mortgage to pay off the final amount owed and then receive monthly payments going forward.
To qualify for a reverse mortgage, you have to go through all the same steps you would for a normal loan. The lender will need a copy of all the documents that prove you are, in fact, the property owner and that you’re not a risky borrower—they’ll want to see a recorded deed of trust, insurance information, tax returns, etc. The lender obviously won’t expect you to have much income, but the rest of the loan requirements apply.
In a reverse mortgage, you remain the property owner. There is no transfer of title to the bank. You are simply borrowing against the equity you’ve built up, and if you set up an annuity (receive monthly payments), the lender has to continue to pay the agreed-upon amount each month, even if it goes over the value of the property, even if you beat the odds and live to be 120 years old.
So why would lenders do this? It seems a little too good to be true, right? Well, not if you have actuaries on your side. Actuaries are people whose whole job is to calculate the likelihood of certain events, including how long you are likely to live. Morbid as that sounds, lenders are betting that if, for example, you are a 62-year-old living in Northern California, you’ll die within 25 years and they use that information to figure out how much of the equity they are willing to loan you, so they don’t have to pay more than they can recoup. The younger you are, the less lenders will loan you per month because they figure you’ll have more years to receive those payments.
When you eventually pass away, your children (or beneficiaries) will have to repay the loan, so you may consider that a downside. But if you have loving children who want you to live a long, comfortable life, I’m sure they’ll support your decision to use a reverse mortgage. If you pass away just a few years after you begin the reverse mortgage, the children only have to pay back the amount you’ve borrowed, not the amount you intended to borrow. And, they do not have to pay more than the value of the property, even if it doesn’t add up to the amount you borrowed.
If you want to learn more about this option, ask your Realtor or a mortgage broker.
If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.