Reverse Mortgages: Safety Net?
Senior Homeowners Cash in on Home Equity with No Payments
Now there's a federally insured way to receive tax-free money, for life, from the equity in your home -- without making payments: the reverse mortgage.
If you need cash, you own a home and you’re 62 or older, there are a few ways to get money out of your property. You could re-mortgage the home or take a home equity loan and take on monthly payments. You could sell your home. But if you are a senior homeowner who wants financial security and a way to remain in your house, you might consider a reverse mortgage.
A reverse mortgage is a loan on the equity in your home. What makes this loan so attractive is that you never have to pay back a dime on the loan unless you move, sell your home, or die. Even if you live there for another 50 years, there are no payments.
You can take the loan in several ways, too – in a lump sum, in monthly payments, or in varying amounts when you decide you need it, much like a home equity loan. The payoff, usually from the proceeds of a sale, covers all interest and other charges.
Federally Insured Safety
The U.S. Department of Housing and Urban Development (HUD) created one of the first reverse mortgages. Because HUD's reverse mortgage is a federally insured private loan, it’s regarded as a safe plan that can give older Americans greater financial and retirement security.
Many senior homeowners use a reverse mortgage to supplement Social Security, meet unexpected medical expenses, make home improvements, invest in the grandchildren’s college education, and more. Homeowners can use the cash any way they want – there are no restrictions.
Retain Title, Stay at Home
One of the more popular benefits of a reverse mortgage is that it allows you to retain title to your home so you can live there as long as you want -- and collect checks for life until you leave the home permanently.
Safety Net for Emergencies
For cash-strapped seniors who lack income for daily necessities or a medical emergency, the loan can act as a financial safety net for any “what if” scenario. What if you need a new car but lack the funds? What if you have a health problem and need to supplement Medicare funds? For many, a reverse mortgage is financial security that can cover many financial needs – without depending on others.
Tax-free Cash
And because the cash received from a reverse mortgage is not considered income, it comes to you tax free and will not affect your Social Security or Medicare benefits.
Growing in Popularity
Despite high upfront fees and many restrictions, demand is growing at record pace. According to the Federal Housing Administration, which insures most of these loans, homeowners took out about 76,000 reverse mortgages in 2006, up from about 7,700 in 2001.
At the current rate this year, lenders could sell more than 100,000 reverse mortgages, more than double the number from 2005, according to the Los Angeles Times, July 15, 2007.
So if you don’t mind losing a chunk of your home equity to fees, these loans have real appeal, especially as more Americans live longer and look for financial support beyond Social Security and dwindling savings.
Bottom line: As a financial tool, today’s HUD/FHA reverse mortgage allows senior homeowners to fund their retirement lifestyle with no monthly payments – and the loan is tax free and backed by Uncle Sam.
Disclaimer: This article is general in nature and not meant as specific investment advice. Individuals should consult an adviser about the pros and cons of a federally insured and tax-free reverse mortgage for his or her specific situation.
