If you're approaching retirement age, own a home, and are considering how best to make ends meet after you leave work, the idea of a reverse mortgage has probably crossed your mind. For those who haven't yet heard about it, a reverse mortgage is pretty much what it sounds like -- a way for seniors to convert home equity into a monthly income, a lump-sum payment, or a line of credit. Reverse mortgages are offered by Fannie Mae
Unlike regular home-equity loans, reverse mortgages are available only to seniors, and there's usually no requirement to make any payments until you die or permanently move out of your home. If you're not sure your nest egg will be enough, or if you own a home and want to raise your standard of living during retirement, a reverse mortgage should be on your list of options.
The basics
To be eligible, you and all co-borrowers (typically, this includes everyone named on the deed to your home) need to be at least 62 years old. You need to own your home outright, and you must be living in it. (If you still have a small balance on your mortgage, you can usually pay it off as part of the reverse mortgage process. The lender will require that the reverse mortgage be the primary loan on your home.) The amount you can borrow is determined by a formula that takes into account the age of the borrowers, the appraised value of your home, and Federal Housing Administration guidelines for your region. (You can estimate how much you'd qualify for with the calculator at this site.)
The FHA regulates reverse mortgages, and its rules provide that as long as you abide by the loan agreement, you can't be forced to give up your home -- even if property values fall and you end up owing more than your home is worth. (The FHA insures lenders against loss.) When you die, the loan comes due, at which point your heirs can either sell the home or refinance the loan, meaning they'd get a regular mortgage to pay off the reverse mortgage.
Key considerations
For some seniors, a reverse mortgage makes a lot of sense. But before you run to the bank, here are some considerations:
- Can you delay getting the reverse mortgage? The longer you wait, the more home equity you're likely to have. Also, given that reverse mortgages have an actuarial component -- the terms take into account how long you're expected to live -- waiting several years will usually increase the amount you'll be able to borrow.
- Consider the fees. Fees for a reverse mortgage are typically higher than those on a regular mortgage -- as much as 12% of the amount borrowed, though competition is expected to drive fees down over time. These fees cover the additional risks assumed by the lender (like if you live longer than expected or your house declines in value). You can usually finance them as part of the loan, but that will reduce the amount you end up borrowing.
- Consider your estate plan. If it is important to you to leave your house to heirs, weighing whether they'll be able to repay the reverse mortgage may be a consideration. While as a general rule, I recommend that you consider your needs first and the needs of heirs later, for some people it's very important to know that their family property will stay in the family.
If you're considering the reverse-mortgage option, check out the Fool's Home Center for more details. In addition, you can find a great article in last December's issue of our Rule Your Retirement newsletter with much more on how to look at reverse mortgages. You can read it free with a 30-day trial. But the most important thing to remember is this: If you can wait longer before taking a reverse mortgage, it's usually best to do so.
To read more about reverse mortgages and get much more expert advice to help you retire well, try the Fool's Rule Your Retirement newsletter service free for 30 days. Your trial includes access to all back issues -- look for Doug Short's reverse mortgage articles in the March 2006 and January 2007 editions -- as well as all current content, planning tools and calculators, and a special members-only message board. Sign up for a free trial and see for yourself -- there's absolutely no obligation.
Fool contributor John Rosevear has many years of payments left on his regular mortgage, and hopes not to need a reverse mortgage for a long time. He does not own any of the stocks mentioned in this article. Bank of America is an Income Investor selection. Fannie Mae is an Inside Value recommendation. The Motley Fool has a disclosure policy.
