Updated: May 3, 2013 12:14PM
Originally published: January 20, 2005
Are you living beyond the income your retirement plan provides? If you’re like many seniors, your home is your largest asset, and although you shudder at the thought of borrowing on it, your house may be the only way to increase your income.
But many seniors don’t qualify for home-equity loans based on income, and in any case, those home-equity loans require a monthly repayment, so they don’t solve your cash-flow problems.
But a “reverse mortgage” may be the perfect solution.
I’ve written before about reverse mortgages -- the simple way for seniors over age 62 to turn the family home into a monthly pension check. This year, the limits have been increased on the amount you can withdraw from your home, either in the form of a lump sum, a line of credit, or a monthly check that you’ll receive as long as you live in your home. And, as reverse-mortgage loans gain in popularity, many seniors are using them to help avoid estate taxes.
How a reverse mortgage works
Reverse mortgages allow you to withdraw money from your home equity, tax-free, with no requirement that it be repaid until you die or move out of your home. You can use the money for any purpose. And there is absolutely no way you can be forced out of your home.
Eventually, when you die or move, the amount of the loan and accrued interest are repaid from the sale of your home. Any remaining proceeds go to your heirs. Or they can pay off the loan and keep the house. But if you live to 100 -- or beyond -- and stay in your home, the monthly check will keep coming. You can never run out of equity in your home, and you can never be forced to sell. And your heirs can never owe more than the home is worth.
The amount you can receive through a reverse mortgage depends on your age, location, interest rates and value of your home. Here’s an example:
A 65-year-old homeowner with a home appraised at $250,000 could receive either a lump sum, net of all fees, of $137,628, or a line of credit for that amount. Or that 65-year-old homeowner could receive a monthly check of $807 for life.
A 75-year-old could receive a lump sum of $161,029 or a $1,061 monthly check for life.
The fees, set by the FHA, can be substantial, but you don’t have to put out any cash; they are calculated into your net monthly check or net lump sum withdrawal.
In the example above, on that $250,000 property, you would pay about $11,000 in fees, divided between HUD, the lender, and appraisal fees and closing costs.
To find a local reverse-mortgage lender, go to www.Reverse Mortgage.org.
Jumbo reverse mortgages are a related option to use in your financial plans.
Reverse mortgages are turning into a big business. Patrick Donohue, the director of reverse- mortgage lending at Residential Loan Centers of America (800-917-4385) says he’s seeing more and more couples with very expensive homes who are considering reverse mortgages to access cash without jeopardizing their home ownership.
“Jumbos work for people with expensive homes -- over $500,000 to several million dollars in value,” Donohue says. “This is not always a question of needing cash, although that’s one reason to take a reverse mortgage. Some people just want to put their home equity to work, or avoid estate taxes while transferring assets to their heirs.”
How jumbo reverses work
Donohue says the really intriguing use of a jumbo reverse mortgage comes in the field of estate planning. In this scenario, a wealthy couple withdraws equity from their home, reducing the value of their estate. They make a gift of money to children or grandchildren through 529 college savings plans or outright gifts.
They also fund an irrevocable insurance trust that buys life insurance on their lives. The trust ownership keeps the insurance out of their estate, and when the couple dies, their children receive the life insurance proceeds tax free. They can then pay off the reverse mortgage and keep the house. Or keep the life insurance cash, plus whatever equity is left after the house is sold and the reverse mortgage is repaid.
Don’t be scared of a reverse mortgage. Turning your house into your pension is your reward for being frugal and paying down your mortgage, instead of burying yourself in debt. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s newscasts. Distributed by Creators Syndicate.