Do you own your home free and clear or have you paid off most of your mortgage? If so, you can actually get your house to support you with a reverse mortgage. While this might not be a good idea for a middle-aged couple, it can be great for couples that have retired and are living on a fixed income.
Dependable income
The best thing about a reverse mortgage is that it produces a steady stream of income that you can depend on. It is called a reverse mortgage because instead of you paying your mortgage company a set amount each month for a certain number of years, the lender (the company that provides the reverse mortgage) pays you a set amount each month. Of course, these payments are actually advances against the value of your home.
While there are different types of reverse mortgages, they are all similar in that you continue to own your home, just as with a normal mortgage. You are responsible for paying the property taxes and for all maintenance, property repairs and homeowners insurance.
You or your heirs could lose your house
The downside is that at the end of the reverse mortgage, either you or your heirs must pay back all the cash advances, along with interest. If you or your heirs cannot do this, the lender (the reverse mortgage company) can foreclose on your house. You should also be aware that there are fees associated with a reverse mortgage just as there are with a standard mortgage. The money you get from the reverse mortgage can be used to pay these fees. However, they will be added to your loan balance and you must pay them back with interest when the reverse mortgage ends.
How much could you get?
How much money can you expect to get with a reverse mortgage? This will depend on the age and value of your home. One reverse mortgage currently available is the Federally-insured Home Equity Conversion Mortgage or HECM. If you have a home worth, say, $200,000 and owe nothing on it, an HECM could probably get you around $640 a month for the rest of your life. Or you could get a credit line account in the amount of around $187,000 from which you could draw whenever you wished. A third alternative would be a single lump sum payment for the same $187,000.
How much would your heirs owe upon your death? The debt will be equal to all of your cash advances, plus all the interest that has been added to your loan balance. If that amount is less than what your home is worth, your heirs get to keep the difference. Of course, if your home is worth less than the loan balance, your heirs would have to make up the difference or they would lose the home through foreclosure.
Make sure you understand what you’re signing
If you feel that you are “house rich” but “cash poor,” a reverse mortgage could certainly help make your golden years happier. However, before you sign up for any reverse mortgage be certain that you understand all of its conditions. Like many things in life, it’s buyer beware. You want to make sure to understand all of the reverse mortgage’s conditions before you sign on so there’s no chance you’ll end up regretting your decision.