Use a Reverse-Mortgage to Boost Income

A reverse-mortgage is not for everyone but is one way to supplement other retirement income. If your income needs a little boost to provide a more comfortable retirement, you can consider converting the equity in your home to monthly income. These mortgage loans will provide funding for your retirement and allow you to continue to live in your home because you still own your home.

The only reverse-mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM. They are only available through an FHA approved lender. To qualify you need to be:

  • Age 62 or older
  • Live in your home as your primary residence
  • Have sufficient equity in your home. Lenders prefer that the home is unencumbered
  • Be able to continue to pay property taxes and insurance
  • Can continue to maintain the home.
  • Willing to participate in a consumer information session given by an approved HECM counselor.

Unlike conventional mortgages, there are no income or credit requirements for HECM mortgages. Borrowers do not need to make any loan payments for as long as they continue to live in the home as their primary residence. When the last borrower moves out of the home or dies, the loan becomes due.

Most of the loan closing costs are similar to those of a conventional home loan. These can include an origination fee and third-party closing costs (fees for services such as an appraisal, title search and insurance, surveys, inspections, recording fees). Borrowers who select a reverse-mortgage pay an upfront mortgage insurance premium. There are limits on the total fees that can be charged for a HECM loan. Most closing costs can be financed as part of the mortgage. Counseling is required and the fee for that is normally paid out of pocket.

The loan is repaid with accrued interest when the home is sold. If there is a balance left after the loan is repaid, you or your heirs keep that balance. If you sell your home for a fair market price that is less than the loan balance, then there is no obligation on your part to pay the lender more than the sale proceeds of the home as long as the sale is an arm’s length transaction in accordance with HUD guidelines.

The money borrowers receive is tax-free, and can be used for any purpose. Borrowers can select to receive payments as a lump sum, line of credit, fixed monthly payments or in a combination of payment options. HECM loan borrowers continue to own the home and are responsible for paying property taxes, hazard insurance, and maintaining the home.

The amount you can borrow depends on the age of the borrower, the value of your home and the current interest rate. The older you are the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount that you can borrow.

If your income needs a little boost to provide a more comfortable retirement, You can consider converting the equity in your home to monthly income with a reverse-mortgage. My personal opinion is that I would only consider the use of a reverse mortgage to supplement monthly income and not convert it to a lump sum. You will lose a degree of control over a great asset with a reverse mortgage. A discussion of this option with your financial consultant would be prudent before making a final decision.

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