One way to boost your income in retirement is to let the bank send you a monthly check. With a reverse mortgage, you borrow against the equity in your home (receiving funds each month, in a lump sum, or with a line of credit) and don't repay the loan until you die, sell, or move out for good. A new breed of reverse mortgage might be especially appealing for certain seniors.
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Reverse mortgages have had plenty of critics, because they can be expensive and complicated—and if you change your mind, you might have to sell to repay the loan. With the federally insured Home Equity Conversion Mortgage (HECM), for example, borrowers must pay 2 percent of their home's value upfront as a mortgage insurance premium and 1.25 percent annually on the loan balance to protect lenders against losses and borrowers against a drop in home value or bank failure, for example. For a $300,000 home, that would mean a $6,000 charge at the outset along with an origination fee (which can also be as much as $6,000), plus closing costs and a service fee of as much as $35 a month.
How much you can ultimately borrow depends on your age (you have to be at least 62), your home's value, and current interest rates. You must own the house outright or be able to pay off your existing mortgage at closing.
The newest model cuts the initial costs pretty dramatically. Known as the HECM Saver, it requires only 0.01 percent of the home value in premiums upfront. So that borrower with the $300,000 house would owe just $30. The borrowing limits are lower, too, though, by 10 to 18 percent. And the Saver interest rate can be 0.25 to 0.5 percentage points higher than that on a standard reverse mortgage. These loans are best for customers who don't need as much cash and won't have the loan out for a long time, says Peter Bell, CEO of the National Reverse Mortgage Lenders Association.
How do you know if a reverse mortgage is right for you? Federal law requires that potential HECM borrowers talk with an approved credit counseling agency—and have a certificate proving it—before they can begin the loan process. For a fee of about $125, these agencies help you sort out the options.
For a rough estimate of how the numbers work out, you can plug your information into the reverse mortgage calculator at the AARP website. A 68-year-old living in Broward County, Fla., whose home is valued at $250,000, could borrow $126,500 as a lump sum or boost his income by $741 a month for as long as he's in the home with a Saver loan. He could borrow about $150,000 or get $881 with a standard HECM loan. Experts suggest that unless you need all the funds at once, a line of credit or monthly payments at a variable interest rate will probably be the most economical choice.
You'll handle taxes, insurance, and maintenance, as you retain title to the home. If these aren't paid, you can face foreclosure. And be sure both you and your spouse are listed as borrowers, says Susanna Montezemolo, vice president of federal affairs for the Center for Responsible Lending in Washington, D.C. Otherwise, if the person who has signed dies prematurely, the other might be forced to sell.
Reverse mortgages aren't a silver bullet and should be considered only as part of a carefully designed retirement plan, says Barbara Stucki, vice president for home equity initiatives at the National Council on Aging. "You can't fool yourself into thinking that your mortgage has vanished," she adds. At some point, you or your heirs will settle up.