It's a phrase that used to make me cringe... reverse mortgages.
Like me, you've undoubtedly heard horrible stories of folks losing thousands of dollars – and even their homes – through scams in this market.
That's why I was surprised a few years ago to learn that my friend, Loretta, used a reverse mortgage to save herself...
Loretta had just turned 69, and her three boys were concerned about her intentions. She had told them over and over what she wanted to do, but they just didn't believe it was true.
At the time, Loretta felt trapped. She had lived alone in her house in Minneapolis for 16 years. Between the interest-only mortgage and her car loan, she felt "smothered." So Loretta was literally tapping into her personal gold mine.
It turns out the Federal Housing Administration gave her money that she will never have to pay back while she's alive. You can do the same. And depending on where you live, there may be a fortune waiting for you to tap. Bigger cities mean more value for your home.
The money she got "gave her a new life," Loretta said. The best part: She can live in her house until she dies, without ever paying a penny to the bank.
If you feel like Loretta once did – stuck financially, but with a home almost paid off – the reverse mortgage will help you safely tap into that wealth. Here's how it works:
In a typical mortgage, you obtain a loan for the purchased real estate and then slowly, over the life of the loan, pay it back to the bank. The reverse mortgage works the exact opposite way. You get the bank to pay you while your health is good, and you don't have to pay it back until you die. This is the sort of deal I like to uncover for readers.
Some lenders offer several types of reverse mortgages, but the Home Equity Conversion Mortgage (HECM) is the one I recommend. The Federal Housing Administration insures HECMs, allowing lenders to keep costs low.
Before you apply for these loans, the U.S. government requires you to meet with an approved independent counselor. The counselor explains all the costs, the features, and the pros and cons of receiving these loans. This law stems from unscrupulous practices back in the late 1970s and early 1980s when some lenders took advantage of the elderly.
Today, these unscrupulous practices are against the law. Lenders can't kick you out, and they certainly can't own equity. Overall, the industry is safe again for seniors.
Who Can Get These Loans?
The loan requirements are simple and easily met.
|•||Be at least 62 years old.|
|•||Own the property with little or no balance on your mortgage.|
|•||Live in the home as your primary residence.|
|•||Receive approval from a reverse mortgage counselor (that simple face-to-face meeting where they make sure you understand what you're doing).|
The amount you can get from your home is based on your age, the value of your home, current interest rates, and whether you "roll" your closing costs into the loan.
Generally, the older you are, the more valuable your home, and the lower the interest rates, the more money you receive. For example, in Baltimore, if your house is worth $400,000 and you're 65, you can get $204,418. If you are 85, you can get $267,218.
Once you get approval, you can receive your loan money in several ways. You can take the money as a lump sum, a stream of payments, a line of credit, or a combination of the three.
If you establish a line of credit, the available credit grows automatically over time. In fact, it grows at 0.5% over the interest rate the lender charges you.
For example, you can get a reverse mortgage for $200,000 today, but take out only $100,000 now. Over 10 years, your $100,000 remaining line of credit could grow again to $200,000.
Of course, interest accrues on the first and second $100,000 payments, but you don't have to pay them back while you're living in your home. Isn't this amazing? So whatever you do, don't tap the full line of credit initially and watch your credit line grow over time.
If you decide to do a reverse mortgage, your heirs might protest at first, but explain to them that all you're doing is borrowing against money you've already saved over your lifetime.
It's your money. And you can do anything with it you wish.
If you are older than 62 and own your home, then you must look at how a reverse mortgage improves your lifestyle. The questions you must ask are simple:
|•||Is there a special trip or big-ticket item I've waited my lifetime to buy?|
|•||Could I face cash-flow problems in the next few years?|
|•||Am I worried about inflation and not having enough money 15 years from now?|
If your answer is yes to any of these questions, then a reverse mortgage will give you peace of mind.
What We're Reading...
- Figure out your approximate mortgage value with this easy-to-use calculator.
- More information on qualifying for HECM.