Reverse Mortgages - Financing Your Retirement Thru Home Equity

Today I received a mailing from Financial Heritage. They offer reverse mortgages primarily targeted at seniors.

With a reverse mortgage, you can receive income as :

  • Monthly supplement
  • One single lump sum
  • As a line of credit - ready for withdrawal
  • Any combination of the above

They offer a way to convert your home's equity into income -- income that is free of income taxes. You retain title to your home. Fannie Mae guarantees the payments made to you. It's also said that Fannie Mae also guarantees you can stay in your home as long as you like -- or so they say.

They do say, however, that you must pay your property taxes, keep property insurance, and "maintain the house". They don't elaborate about what happens if you don't do these to the lender's liking.

There obviously are going to be some costs associated with the reverse mortgage. A maximum cost of $3,500 is referenced. They will finance most costs, but costs are something to watch out for. They will provide a "good-faith estimate" of costs.

Two requirements are listed :

  • Both spouses must be 62 or older (singles are eligible, I assume)
  • Own your home and occupy the home as your principal residence (may be eligible even if subject to first or second mortgage)

Listed benefits of reverse mortgage :

  • No monthly payments made by you - you receive income on shrinking equity
  • Money can be used for any purpose
  • You retain title to home
  • No income qualifications
  • Money received is tax free (no sale, so no capital gains)
  • You can sell home at any time (but then your payments will stop)
  • Social Security and Medicare not affected
  • FHA insured - Fannie Mae guaranteed
  • Growth on credit line option

Taking out a reverse mortgage when interest rates are low means more money to you!

If you're a senior with equity in your home, and you're looking for more income, I'd recommend you consider looking at reverse mortgages. However, shop around for the best deal. Check out the National Reverse Mortgage Lenders Association.

Also, note that the biggest "risk" associated with a reverse mortgage is early loss of the monthly payments - if you choose monthly payments. For example, if you give up most or all your equity in, and then the house is sold the next month, you'll have received only one monthly check. Not a good deal if you give up $200,000 in equity for one monthly check of $1,000. Conversely, it can be a good deal if you stay in the home for 30 years (30 x 12 x $12,000 = $360,000 in this example). This is essentially a form of life insurance.

You also face a risk of inflation. If your monthly payment remains stuck at $1,000, and prices double every few years, your $1,000 monthly payment will soon appear quite small.