In 1960, the average life expectancy in the United States was just under 70 years. By the early 1980s it was around 75, and in 2012 the average hit 79. This upward trend tracks the phenomenal medical advances of the last 50 years. We are living longer, healthier lives, and that’s undoubtedly a good thing. Our extended lifespans, however, create challenges for retirement planning. The traditional retirement age of 65 was established when the average person wasn’t living past 70. While the retirement age will soon increase to 67, that still leaves around 13 years for retirees to plan and save for. For many retirees, a reverse mortgage can help free up cash to help cover medical costs, pay living expenses, and maintain their property.
Who is Eligible for a Reverse Mortgage?
To be eligible, the youngest homeowner must be 62 or older. You also should have enough equity, roughly 40%, built into the house. You can use the funds to pay down an existing mortgage, but you will not be able to secure a loan if the proceeds from that loan wouldn’t cover the existing mortgages.
How Does it Work?
Not surprisingly, it works like a regular mortgage… in reverse. With a standard home loan, you borrow from the bank to buy the property and pay off the balance over time. As you pay off the loan, you are building equity in your home. A reverse mortgage is a loan where the lender pays you, using that built-up equity as collateral.
The payments can be distributed in a number of ways. It can be a line of credit to draw on until the limit is reached, it can be monthly payments over a fixed period of time, or it can be a lump sum. The right disbursement plan depends on what you intend to use the funds for. If you want to use the money to pay for a big home improvement project, a lump sum might be best. If you’re using the money to eliminate existing mortgage payments, then monthly installments might work for you. If you need money to cover medical expenses, but aren’t sure what the total costs will be, a line of credit makes sense.
What about Inheritance?
By drawing the equity out of your property, you will not be able to leave that equity to your heirs. If the value of your house exceeds the loan, your heirs can choose to sell the home to pay off the balance of the loan or pay the loan with other funds and keep the home. If, on the other hand, the debt exceeds the value of the property, your heirs won’t be responsible for the outstanding balance. Most of the time, there is ‘non-recourse’ clause which prevents your heirs from owing more on the home than it’s worth.
If you find yourself in a position where your retirement nest-egg no longer covers all your expenses, a reverse mortgage can help free up extra cash to help keep you comfortable in your golden years.
