If you’re at least 62 years old and you own your home outright, you can borrow against it and never have to pay back the loan. It’s called a reverse mortgage and it allows you to convert some of your home’s equity into cash. Unlike traditional mortgages, the loan does not have to be repaid until you move out of the house or pass away.
As you approach your mid-60s, you may find your Social Security check doesn’t support the lifestyle you want. Maybe you’d like to go on vacation or buy a car or help pay for your grandkids’ college expenses. With a reverse mortgage, you can augment your income with a lump sum payment or receive monthly payments, neither of which is considered taxable income. All you have to do is live in the home, maintain it and pay property taxes. A reverse mortgage may allow you to defer retirement account withdrawals, allowing that money to continue to accrue.
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 must continue to pay the agreed-upon amount each month, even if it goes over the value of the property, and even if you beat the odds and live to be 105 years old. (Of course, lenders use actuaries to calculate how long you’re likely to live 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.)
This is a non-recourse loan, which means even if the total amount owed exceeds the current value of the home or if the value of the home drops, your children or beneficiaries are not on the hook to pay off the difference between the loan amount and the current market value of the property. Of course, since you’ve traded your equity for cash, the property will go to the bank rather than your heirs after your demise unless they repay the loan. If the value of the property increases enough over time, once the home is sold and the reverse mortgage paid off, the remaining proceeds would go to your estate.
Although no one can predict the future, property values typically increase over time. During the last 20 years, home prices have doubled, even with the housing bubble bursting during the 2008 recession.
To see how a reverse mortgage could work, let’s look at an example. Imagine you took out a 60 percent loan at 5 percent interest in 2012 when your home was worth $275,000. That means your loan amount was $165,000. Today, you’d owe $235,000 including accrued interest. The good news is that during the last six years, the property increased in value to $500,000, so if you wanted to sell, you could pay off the reverse mortgage and walk away with $250,000 cash. Or, if you passed away, your heirs could.
When you eventually pass away, your heirs will have to repay the loan if they want to keep the house. Depending on market conditions, this may cost them money. However, if you die just a few years after you begin the reverse mortgage, the heirs only have to pay back the amount you’ve borrowed plus interest, not the amount you would eventually have borrowed.
To learn more about reverse mortgages, talk to your Realtor or mortgage broker.
If you have questions about getting into real estate, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 40 years.