Did you know that if you are 62 or older, you can use a reverse mortgage to borrow against the equity in your home? Instead of making mortgage payments, the bank will pay you, either in a lump sum, with monthly payments, or via a line of credit—and as long as you continue to live in the house, you do not have to repay the loan.
With a reverse mortgage, you continue to hold title to your property. Lenders simply add a lien onto the title to be sure they can recoup expenses once the loan is eventually paid off (usually when the last borrower dies and the heirs sell the property). This is the same type of lien lenders use for conventional loans.
Who can benefit from a reverse mortgage? Generally speaking, anyone 62 or older who has some equity in their home. Specifically, 1. Anyone 62 or older who owns their home outright (or has a lot of equity) and needs a big cash infusion. 2. Anyone 62 or older who would like to increase their standard of living above what their pension, 401K, and/or Social Security income affords. 3. Anyone 62 or older who wants ready access to cash to take advantage of income opportunities or to be able to cover unexpected expenses. With reverse mortgages, the cash can be used however you like. (I don’t recommend heading to Vegas, but legally, you could.) The amount of the reverse mortgage depends on how much equity you have in your home and your age.
For a big cash infusion, your lender would structure the loan so you get a single, lump-sum payment. The balance on the loan increases as interest accrues during the term of the loan, and eventually the loan must be repaid, but until you move out of the house or pass away, the loan does not need to be repaid. Be aware, you can also use a reverse mortgage to purchase a home.
To augment your income, your lender would set up an annuity so you get monthly payments. The amount you receive monthly will depend on your age and your equity in the house. Like insurance companies, lenders hire actuaries who estimate how long you’ll live. They’re taking a bit of a risk because even if you live to be 106 years old, they must keep paying the agreed-upon monthly amount, even if the market value of the home cannot cover the loan.
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.
To create a rainy-day fund, your lender would extend a reverse mortgage line of credit. This is my preferred option. I like it because you only draw what you need when you need it. And you can reduce the principal on the loan (and the accompanying interest) by repaying the line of credit, should you have the means and desire to do so. Be sure to check the interest rate and note whether it is fixed or variable, so you don’t get any unwelcome surprises.
In any real estate transaction, I always say, “The large print giveth and the small print taketh away.” Read the whole agreement, especially the fine print. If you have questions, talk to your accountant or financial advisor.
If you have questions about property management or real estate, please contact me at email@example.com 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 45 years.