Converting Home Equity Into Income for Retirement
The reverse mortgage is getting a lot of play these days in the media, but what is it exactly? Let’s take a closer look at it and some of the issues that arise.
The reverse mortgage is a form of negative amortization, but with a favorable side effect. While you make payments to a lender with a traditional home loan, the lender makes payments to you with a reverse loan.
The reverse mortgage is based on the equity in your home. Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount.
A thought that may have popped into your mind is what ultimately happens when the equity in the home is used up? If there is no equity, do you still own the home? Are you expected to pay off the loan? Do you get evicted?
In the past, the ugly answer is that you would lose the home. Since senior citizens sitting on a curb did not go over well, the government stepped in. Most plans now allow you to stay in the home even if the equity is used up entirely.
Considering you are giving away a big chunk of your nest egg, you should get some sizeable payments, right? Well, maybe. There are a lot of factors involved. These include the dollar value of your equity, your age and so on.
If this sounds too vague to you, don’t worry. One of the biggest factors is the program you choose. There are different ones offering different payment amounts. You can even take lump sum payments in some cases.
At some point in time, you might realize a reverse mortgage is not for you. Can you get out of it? Generally, you can so long as you pay off the mortgage debt. Make sure to read the loan documents for language on this issue.
Another issue that arises is appreciation. What happens if your home appreciates over time? Can you get at the new equity? In most cases, you can. Whether this has to occur through a refinance or a modification to the reverse mortgage is a case by case decision.
So what happens when you reach the end of the line? In such a situation, the home is handled just like one with a traditional home loan. Your heirs will either sell it or come up with the money to pay off the reverse mortgage.
The reverse mortgage is undoubtedly a new toy in the loan industry. That being said, it is very expensive. For a majority of people, it is a bad choice compared to other alternatives that are cheaper and produce more income.
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