Home equity loans have been, until recently, an easy way for Americans to finance their spending. For seniors with mortgage free homes, one of the most popular ways to do this is by means of the reverse mortgage. A reverse mortgage allows you to borrow money against the equity of your house, without having to pay it back in installments. The repayment takes place you die, move house or sell it off. A reverse mortgage requires no income proof and the only eligibility criteria is home ownership by a person aged 62 or more.
You can opt to receive the money in the form of regular monthly payments, in effect creating a regular income stream, not unlike that which you would receive from an annuity purchase. You can, of course, accept the full amount in a lump sum payment. Repayment does not start until you stop using the house as a residence, as stated above. The full amount you owe, including interest payable on the loan, cannot exceed the value of the house. Thus you are protected against a fall in the real estate prices or other factors leading to a drop in the value of your house.
Due to the age restriction, a reverse mortgage cannot be applied for until you are 62 years old. However, considering the volatility in real estate prices, and the current subprime crisis, no one can really predict the price of your most prized investment – You house – 5 or 10 years from now. For baby boomers on the verge of retirement, the reverse mortgage is a very valuable tool to keep in mind while planning for retirement. Chances are that your mortgage payments are fully paid up by now, and your retirement savings may not be sufficient to match the ever increasing monthly payments on healthcare, long term care costs or inflation fueled price increases on utility bills and gas prices.
Should you be facing a situation where you retirement fund dries up and the only asset you have left is your house, a reverse mortgage will not only provide you with immediate funds to replenish your retirement savings, but also a regular income stream to take care of required payments as long as you live. And without having to pay for it.
A suggested strategy for using reverse mortgages is to accept a lump sum payment and invest in a diversified portfolio or a hybrid annuity which offers both an immediate income stream and builds the principal investment into a bigger nest egg for later years.
Please note that due to fluctuating real estate prices, the amount of loan you are eligible to receive based on the value of your house might vary from time to time, and you are advised to consult your financial planner or a trusted real estate broker, and do your own research, to find a reverse mortgage lender who offers you a favorable deal.