If done properly, your home is one of the best financial investments you can make. The key is in buying a home in an area with good property values, and in investing the time and energy in managing the upkeep of your home.
Once you have accrued enough value or equity in your home, you can use that equity to improve your home and further increase its value. If you are over age 62, you can also use that equity in something called a reverse mortgage, which you can put toward your home, or use to supplement your retirement income.
What is a reverse mortgage?
A reverse mortgage is a loan against the value of your home. Unlike a standard mortgage, where you pay back a portion of the loan each month, the bank pays you money and you do not have to pay back the loan for as long as you live in your home.
You can opt for monthly payments for a set amount of time, monthly payments for as long as you live in your home, a line of credit that you can draw upon until you have used it up, or a combination of payments.
While you do not have to make monthly loan payments, the loan must be repaid when the last surviving borrower dies, or if you move or sell the home.
Types of reverse mortgages.
There are three major types of reverse mortgages, and they all server different purposes.
The Single-Purpose Reverse Mortgage is available through your state government, or a state or local government-funded non-profit. These types of loans can only be used for one purpose, which is specified by the lender, such as home improvement or medical expenses. These types of reverse mortgages have the lowest upfront costs, but they are also not available in all areas. Additionally, if you use the funds for other than their intended purpose, you could end up having to pay the loan back.
The Federally-Insured Reverse Mortgage is also known as the Home Equity Conversion Mortgage (HECM) and is available through HUD. These types of loans can be used for multiple purposes, and the borrower can determine where the funds go. These types of mortgages have higher upfront costs than the Single-Purpose Reverse Mortgage, but they are also more widely available. The HECM program also allows borrowers to live outside of the residence, in a nursing home, for up to 12 months before the loan becomes due.
The Proprietary Reverse Mortgage is available through private companies like American Advisors Group. Whether or not these loans have limitations or restrictions on how the funds are used depends on how the company has designed the product. Like the Federally-Insured Reverse Mortgage, the upfront costs are higher and some lenders may also require borrowers to receive counseling prior to taking out the loan. You can learn more by checking out the youtube page of AAG Reverse Mortgage where they post informational videos to help educate, you, the consumer.
Things to Consider
Many reverse mortgages do not have income qualifications, but you must have your home appraised to determine its value.
Because you do not pay back the loan until after you leave the house, it is possible that the house will go to the bank to pay off the loan. This means that if you wish to leave the property to your heirs that you will need to have a plan for repaying the loan that does not involve your property.
To qualify, you need to be at least 62 and you must own your home free and clear, or have an existing mortgage that is small enough that the proceeds of the loan will cover the costs.
You must pay your property taxes and homeowners insurance for as long as you live in the house. If you fail to do either you could be in default and in danger of foreclosure.
A reverse mortgage can be a great way to supplement your retirement income and enjoy the equity you have built in your home, tax free.