One of the retirement planning resources that has gained interest in recent years is the reverse mortgage. A reverse mortgage allows you to convert part of the equity in your home into cash without paying additional monthly bills. If you’re 62 or older — and want money to pay off your mortgage, or pay for other expenses — you may consider a reverse mortgage. If you decide to look for one, the Virginia Society of Certified Public Accountants (VSCPA) answers these three questions so you can decide if a reverse mortgage is right for you:
1. What is a reverse mortgage?
A reverse mortgage is a type of home loan that allows you convert a portion of you home’s equity into cash. Reverse mortgages take part of the equity in your home and convert it into payments to you — a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you don’t have to pay it back for as long as you live in your home. However, you or your estate must repay the loan when you move or when you die.
2. What kind of reverse mortgage can I get?
There are three types of reverse mortgages:
Single-purpose reverse mortgages are the least expensive option and most homeowners with low or moderate income can qualify. The loan can only be used for one purpose, which is specified by the lender (i.e., home repairs). They’re offered by some state and local government agencies, as well as non-profit organizations, but they’re not available everywhere, so check with your financial advisor to see what’s available in your state.
Proprietary reverse mortgages, also known as private company reverse mortgages, are backed by the companies that develop them, are not federally insured and are typically designed for borrowers with higher home values. If you own a higher-valued home, you may get a bigger loan advance and qualify for more funds with this type of loan.
Home Equity Conversion Mortgages (HECM) are federally-insured and can be used for any purpose, from supplementing retirement income to covering daily living expenses, to preventing foreclosure on your home. These loans tend to be the most popular and are backed by the U. S. Department of Housing and Urban Development (HUD).
3. Is a reverse mortgage right for me?
There are pros and cons of a reverse mortgage, and only you can determine if it’s the right decision. Because there isn’t an income requirement on reverse mortgages, you will likely pay higher fees and interest rates with these loans. These loans can also make it difficult to leave your home to an heir. The loan must be repaid once you die, and oftentimes that means selling the home or your heir will use his/her inheritance to pay off the loan. In many cases, a reverse mortgage isn’t worth it because of these drawbacks, but that’s not always the case.
However, if you need cash for your retirement expenses, then you might want to explore a reverse mortgage. They can help ease the strain on your finances, especially if a large portion of your money is locked into your home. Ultimately, you need to weigh the pros and cons for your situation, and consult with a professional to make the best decision for you.
Turn to Your CPA
Your local CPA can offer advice on your options, and help you create a plan that will maximize your money and safeguard your assets. Be sure to contact him or her with all your financial questions.