Thursday, March 8, 2007

Reversing your mortgage

If you need extra income to help maintain your current standard of living after you retire, or if you need extra income for personal care expenses, you may want a reverse mortgage. A reverse mortgage is an agreement between you and a lender that allows you to "tap into" the equity built up in your home. You can do this in a few different ways: Your lender may give you a lump-sum payment, send you monthly payments, offer a line of credit, or some combination of these options.

There are some standard restrictions on who can enter into a reverse mortgage agreement - usually, you must be at least 62 years old and have no outstanding requirements to be eligible for a reverse mortgage.

The amount of money that you can access ranges from 10 to 48 percent of the value of your home. The total funds you can access is determined by:

  • The value of your home
  • Your age
  • Current interest rates
  • The type of reverse mortgage you choose

Unlike a conventional mortgage, a reverse mortgage does not have to be repaid right away - repayment starts when your home ceases to be your principal residence (a home is no longer considered a principal residence if the borrower moves elsewhere, dies, or sells the home). When you do begin to repay the mortgage, you are responsible for the borrowed principal plus interest and any other legal or administrative fees associated with the agreement.

The amount that you must repay for a reverse mortgage cannot exceed the value of your home, and you cannot be forced to sell your home to repay the mortgage if you still reside there. When lenders determine the amount a borrower can receive, they're betting that the home will not depreciate significantly and that the borrower will not reside there so long that payout exceeds the value of the home.

Repayment can be made by you, your family, or your estate, and need not involve the sale of your home. If you do decide to sell your home, whatever profit you make over the market value of your home is yours to keep. Should the sale generate less than the value of the reverse mortgage on your home, it is usually the responsibility of a third party, such as insurance provider, to make up the difference.

Although not many homeowners have taken out reverse mortgages, the popularity of this option is growing. If you feel it's important to pass down your home to children or grandchildren, you may not want to experiment with a reverse mortgage.

Many seniors consider a reverse mortgage because they cannot pay all the bills required to maintain their home. Seniors should investigate whether or not they can defer their property taxes, which would mean one less hefty bill to pay each year, and may allow them to postpone or eliminate the need for a reverse mortgage. If property taxes are deferred, they are generally repaid when the homeowner moves out of the property, or when the home is sold. Consider this tax-deferral option first before opting for an often restrictive reverse mortgage.

About the author
Tony Reed