Would you like to receive a check from the bank to supplement your income after you turn 55 years old? If you own your own home, the equity in your home can become a source of income, and you don’t have to have any other income sources to qualify.
I know it sounds too good to be true, and I’d be lying if I said there were no strings attached; however, you can borrow against the equity in your home and use the money however you see fit, whether you want to go on a fabulous vacation or simply have a higher standard of living.
This is all possible because of something called a reverse mortgage. The bank gives you a loan based on the value of the equity in your home and how long you’re likely to live. As long as you remain in your home, you never have to pay the loan back, even if you live to be 110 years old. You can receive the payment from the bank either in a lump sum or as a monthly payment.
With a regular mortgage, you—the homeowner—pay the lender every month. Some of the payment goes toward reducing the principal (the loan amount) and some goes toward interest (the cost of borrowing the money). Each month, you have a little more equity in the home (you’ve paid off more of the loan’s principal).
In a reverse mortgage, the bank sends the homeowner a check and reduces the equity the homeowner has in the property. If a person lives so long that the amount owed is more than the home’s value, the homeowner can stay in the home and the Federal Housing Administration will cover any loss to the lender.
The amount you can get is based on the value of the home and the age of both the owners. The rates are a little higher than for a traditional mortgage, but not too much. To explain how the loan is calculated, let’s say a house is worth $350,000.00 and both owners are 60 years old the lender will make a one_time lump sum payment of $ or a monthly payment of $ . If the payments are to be monthly they will go on until the last owner passes away or moves out of the home. This means the borrower(s) never have to pay the loan themselves. Ultimately the house will be sold but not while the owners still live in it.
You’ll want to consider your heirs in all this, because you are using up part of your wealth rather than passing it on to them. When you pass away, to retain the house, your heirs will need to repay the reverse mortgage loan either by selling the home, refinancing the loan, or paying the loan with cash they have on hand. However, your heirs are not on title and have no obligation to pay off the loan. If the loan exceeds the value of the house, the heirs can simply let the lender take possession and sell the house. This will not cause any negative impact on the heirs’ credit standing.
In addition remember, while you live in the house you must keep insurance and taxes current and reasonably maintain the property.
If you’re wondering about the tax implications of this whole endeavor, don’t worry. The interest on the loan isn’t deductible until the loan is paid. In other words, as long as you live in your home and benefit from the reverse mortgage income, you’re good.
Reverse mortgages can be essential in allowing retirees to remain financially independent, even with no income and bad credit. Since the retiree won’t ever have to make any payments, the only qualifying criterion is the equity in their home.
Next time I’ll write about as-is properties. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at 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.
