If you own your home free and clear or have a lot of equity in it, you may be able to tap into it with a reverse mortgage. This mortgage option is becoming more popular for seniors who want to stay in their homes but need the money that they’ve invested in it thus far.
Here’s how it works.
How a Reverse Mortgage Works
When you take out a reverse mortgage, you borrow against your home’s equity. Here’s the difference.
You don’t make payments monthly on the amount you borrow. Interest accrues like normal, but the loan doesn’t become due and payable until you move out of the house or pass away. You are free to make interest (or principal) payments if you want, but it’s not required.
The amount you can borrow is based on the home’s value (like a traditional mortgage), but also on your age. The older you are (and your co-borrower) the more you can borrow. The amount allowed is based on the age of the youngest borrower because they have a longer lifespan.
Who is Eligible for a Reverse Mortgage?
Unlike a traditional mortgage, the reverse mortgage has many eligibility requirements including:
- The primary homeowner must be at least 62 years old
- You must live in the property full-time
- You must be able to keep up with the home’s maintenance, real estate taxes, and homeowner’s insurance
- You must not have any delinquent federal debt
- You must undergo housing counseling
Pros and Cons of the Reverse Mortgage
- You don’t have to make payments on your mortgage
- You can live in your home and use the money you invested in it while you’re alive
- You can have an emergency fund while you’re in retirement
- You can use the funds to supplement your retirement income
- The ‘income’ is tax-free
- Like any mortgage, there are closing costs
- You must be able to keep up with the home’s maintenance, taxes, and insurance
- You use up the equity in your home which may be needed for retirement or meant for inheritance
How you Receive Reverse Mortgage Funds
You can receive reverse mortgage funds in several ways including:
- Term payments – You receive the same amount every month for a specific term
- Line of credit – You receive a line of credit that you use when you need (like a credit card)
- Tenure payments – You receive the same amount monthly for the rest of your life
You can also receive funds in a combination of ways, depending on what financial needs you have.
A reverse mortgage is a great way to ‘age in place.’ You get to keep your home and don’t have to make payments on your mortgage. Whether you’re looking for a way to supplement your retirement funds, have an emergency fund, or just have fun, there are many ways to get the funds you need.
If you’re ready to explore your options for a reverse mortgage, contact the professionals at EPM to see how we can help.