MORTGAGES

Going In Reverse

Many seniors use equity in home to generate income

WRITER: JAMES COMBS

For retirees, there may come a time when generating extra income becomes necessary. For many people age 62 or older, a reverse mortgage is an attractive option for retirees needing money to finance a home improvement, pay off a mortgage, supplement their retirement income or pay for healthcare. It can also help them remain financially comfortable throughout their retirement years. In a regular mortgage, borrowers make monthly payments to a lender. Conversely, when borrowers take out a reverse mortgage they receive cash payments from the lender based on home equity and the borrowers are not obligated to pay anything back for as long as they live in their home. This loan is generally not taxable and does not affect Social Security or Medicare benefits. However, the loan must be repaid in full when homeowners die, sell their home or when their home is no longer their primary residence.

Borrowers can choose to receive money from a reverse mortgage in one of several ways:

1. Lump Sum—they receive money all at once.

2. Line of credit—they make withdrawals whenever they choose and whatever amount they’ve chosen up to their maximum principal limit.

3. Tenure plan—they receive fixed monthly payments as long as they own and occupy the home.

4. Term plan—they receive monthly payouts for a fixed number of years.

5. Combination—they can combine the lump sum or tenure options with the line of credit.

The money can be used for anything, whether it’s paying off existing debts, widening hallways in your home or preventing a foreclosure. Nevertheless, borrowers continue paying homeowner’s insurance and taxes on their home, as well as maintenance costs.

Sources: seniorcitizensguide.com/articles/onnecticut/reversemortgage.htmconsumer.ftc.gov/articles/0192reverse-mortgagesbankrate.com/finance/financial-literacy/the-ins-and-outs-of-reverse-mortgages-1.aspx

ADVANTAGES

No loan repayment is required as long as you live in the home. Therefore, your home cannot be foreclosed as long as you continue living in it.

You retain full ownership of your home.

You receive tax-free funds as long as you live in the home.

Reverse mortgages are insured by the federal government, which guarantees that you receive all of your scheduled payments.

There are no credit score or income requirements.

SOURCE: retirementlifefunding.com/ benefits-ofreverse-mortgages/

DID YOU KNOW?

One-third of retirees receive 90 percent of their income from Social Security, according to figures from Boston College’s Center for Retirement Research. A reverse mortgage can supplement Social Security and other income sources.

Nothing Is Free

Much like a traditional mortgage, there are costs associated with a reverse mortgage. The Federal Trade Commission says lenders charge an origination fee, a mortgage insurance premium and other closing costs.

Money From Home

In 2013, borrowers took out $15.3 billion in reverse mortgage loans, according to the industry publication Inside Mortgage Finance. That’s a 20-percent increase from 2012. In 2009, $30.21 billion in reverse mortgage loans were made, a record.

REVERSE MORTGAGE VS. HOME EQUITY LOAN

In a home equity loan, also known as a second mortgage, a homeowner borrows money against the equity in his or her home. Equity is the difference between how much your home is worth and how much you owe on the mortgage. With a home equity loan, borrowers must make monthly payments on principal and interest. Since a reverse mortgage pays you, there are no principal and interest payments. Also, with a home equity loan, you are putting up your home as collateral.

SOURCE: portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten