If you are 62 and you have paid off your house or have at least 40% equity in your home, you can turn an illiquid asset into cash to supplement a retirement income. You will be able to then take out money based on that equity (up to $625,500) in a lump sum, through a credit line, or in monthly payments. The loan is repayable only after you move out of the house or die. This is called a reverse mortgage.
A reverse mortgage is a good way to have a home to live in and still get money for it without paying loan payments, without renting, and without incurring mortgage debt.
There are pluses to this arrangement:
- Getting money in this way requires no income qualification and no home equity borrowing. There is also no non-payment jeopardy.
- The money you take out is not taxable.
- If you take the money out as a credit line, the money left in the account will accrue interest at the same rate as interest charged to the reverse mortgage.
- Right now, due to decreasing home owner values and Federal Housing Administration (FHA) limits, banks are competitive for reverse mortgages, waiving loan origination and other upfront fees.
- The equity of your home will be frozen for purposes of your reverse mortgage even if property values go down after the loan is finalized.
You maintain title of your home.
There are also minuses to consider.
- You can not take out the full amount of money equal to your equity. The amount you can take is based on your age. If you are 65, you may take a reverse mortgage out on half your equity. This increases to 70% at the age of 85.
- There is an interest rate charged to the amount you take out. A final payment is due upon your death or when you sell your home. This payment will include the amount of cash you took out plus fees and accrued interest.
- If you leave your home to family, the family will be responsible for the payment.
- If you sell shortly after taking out a reverse mortgage the amount due could outstrip the money you owe on your house. Consider this if you are in poor health and may have to move into assisted living.
The pluses and minuses are not equal, but minuses for you may outweigh any pluses. It is all very individual. Understand what a reverse mortgage involves, let your family know your thoughts, and consider the age of your spouse and what you plan to do through the last years of your life before making the decision.
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