Reverse Mortgages and Retirement

Wesley Watkis

Contrary to popular hype, getting started for retirement late is not a crisis - as long as the right plan of action is put in place. One increasingly popular source of retirement income is the reverse mortgage. Although we typically think of a 401(k) or an IRA when we think of saving for retirement, a reverse mortgage allows you to access the equity you have already built in your home as a source of income. This makes a reverse mortgage an option if you are looking to save for retirement or pay for a home improvement, health care expenses, or to support the transition to a long-term care facility. How Does a Reverse Mortgage Work?

A reverse mortgage basically operates in the same way a traditional "forward" mortgage is negotiated with a lender. However, instead of paying a monthly payment to the lender, you actually paid for the existing equity in your home.

Overall, there are three types of reverse mortgages: Single-purpose reverse mortgages are offered by some nonprofit agencies, as well as some local and state government organizations. Though this is the least expensive option, it is available only in certain areas and the lender specifies its use.

Federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are backed by the U.S. Department of Housing and Urban Development (HUD). HECM loans have no restrictions on use, are widely available, and have no income or medical requirements. Prior to applying, you must meet with an HECM-approved counselor. Up-front costs are typically higher than a traditional mortgage with this type of loan, but the total cost is lower compared to proprietary reverse mortgages.

Proprietary reverse mortgages are private loans backed by the companies that create them. Some lenders require counseling before application. Again, up-front costs are typically higher than a traditional "forward" mortgage with this type of loan; however, if you own a higher value home, you may receive a larger loan advance with a proprietary loan than with an HECM.

Once you negotiate a reverse mortgage with a lender, there are several payment options available to you. Among them are monthly payments, a line of credit, or a combination of the two. Repayment is generally required only when your home is sold, or is no longer your primary residence. Most reverse mortgages contain clauses to ensure that you will not owe more than the value of your home.

Is a Reverse Mortgage Right for You?

If you are 62 years or older, have established equity, or own your home outright, you are eligible to apply. You must also live in the home as your primary residence. Your age, the type of reverse mortgage you choose, current interest rates, and the value of your home are some of the factors that determine the amount of your loan. In the case of HECM or proprietary loans, you may do as you wish with the cash advances, and they are typically tax-free. A reverse mortgage allows you the freedom to use the equity you've built in your home, and is an option for many who may have gotten started saving for retirement late. Be sure to understand all of the conditions surrounding the type of loan you choose and discuss your options with a financial advisor or loan counselor before making any final decisions.

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