Updated: May 3, 2013 12:14PM
The housing world is divided into two categories: those who carry the largest mortgages possible, and those who plan to pay them off as soon as possible.
The mortgage-burning ceremony is a nostalgic remnant of an earlier era. But the estimated 10 million seniors who have paid off their mortgages have a new reason to celebrate. Using a "reverse mortgage," they can now create a tax-free monthly "pension" check that will last as long as they live in their home.
Reverse mortgages are a concept that's catching on -- but slowly. That's because seniors who had the good sense to pay down their mortgages are now very hesitant to borrow against that home equity to supplement their monthly income.
That's understandable -- but it's a mistake. And I hope I can convince you to at least consider whether a reverse mortgage might be appropriate for you or anyone who is house-rich but income poor.
Helped dad get one
To make the point, and with his permission, I want to let you know that's exactly what I did for my own 84-year-old father a few months ago when I helped him take out a reverse mortgage on his paid-up retirement condo. So you see, I'm putting my money where my mouth is. Or to be more accurate, I helped my dad to put his own money in his pocket -- just as I've been advising you to consider.
This kind of financial independence is priceless, and well-deserved. Why shouldn't your house pay you back for all the money you've put into it over the years -- especially with the guarantee that you can never lose the roof over your head?
To get a reverse mortgage, you (and your spouse or co-owner) must be at least age 62. But it's best to wait until you're at least in your 70s, because the amount of money you can receive each month or in a lump sum is determined by the value of your home, your age and the current level of interest rates. The older you are, the more money you'll receive.
If you'd like to figure out how much money you can receive on a reverse mortgage, go to www.ReverseMortgage.org, and use the handy online calculator. This Web site will also allow you to search for a lender in your area that makes reverse mortgages.
To qualify, your original mortgage must be paid off, or have only a small remaining balance, which will be paid off as part of the process. You sign up with a participating lender, such as a bank or mortgage company. They'll process the paperwork and give you a choice of ways to receive the money: monthly check, lump sum, line of credit.
There are monthly adjustable interest costs and significant fees that apply to a reverse mortgage, but these are rolled into the balance of your loan, and should not be a deterrent to considering a reverse mortgage.
Then there's the big question: What happens if I die, move into a nursing home, or sell my house? That's when the reverse mortgage must be repaid. When you sell the home, you repay the reverse mortgage out of the proceeds. (Remember, the home is likely to have increased in value over the years since you took out the reverse mortgage.)
If you move out of your home for longer than one year, then the home can be sold, unless your spouse and co-owner is still living there. But if you just go to Florida for the winter, or spend time in a hospital or a have short stay in a nursing home, you don't have to worry about your house being sold out from under you.
If you die and leave the home to your children, they can take out a conventional mortgage and repay the reverse mortgage. Or they can sell the home and keep the balance after the reverse mortgage is paid off.
No one can force you to sell
Let me stress again: No one can force you to sell the home while you still live there. Another important note: The repayment amount can never exceed the value of your home at the time the loan is repaid. You or your heirs can never owe more than the home is worth when you die or move out and sell it.
There are federal limits on the total size of a reverse mortgage, based on where you live. Currently, the caps range from $200,160 to $362,790.
Seniors considering a reverse mortgage must have independent counseling, usually given by AARP over the phone (800-209-8085). That means you'll have plenty of chances to ask more questions. So if you're a senior -- or if you have parents who might benefit from more monthly income -- it's time to consider a reverse mortgage. And that's The Savage Truth.
Terry Savage is a registered investment adviser.
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