Q. What is a reverse mortgage?
A. A reverse mortgage is a financial tool that lets you take money out of your home to help fund your retirement. However, financial advisers caution that they’re not for everybody, and should probably not be your first choice for supplementing your income.
They’re called “reverse” mortgages because instead of paying back a loan to a bank and building up equity, or ownership, in your house, the bank is paying you out part of the equity in your home in cash, either in a lump sum, regular payments, a line of credit or some combination. The debt incurred would be paid off once the home is eventually sold, typically once the person who took out the loan moves out, sells the home or dies.
These types of loans are relatively new, but more people are using them.
Darryl Hicks, spokesman for the National Reverse Mortgage Lenders Association, an industry group, says Congress passed a law in 1988 creating a reverse mortgage loan program that was guaranteed by the U.S. Department of Housing and Urban Development, or HUD.
Issuance of those loans has grown since then from a few thousand a year to 85,639 in 2006, up from 48,493 the year before, according to data compiled by the association from HUD.
Taking out a reverse mortgage is an option some people choose if they have a fair amount of equity in their home, need income, are at retirement age, and don’t want to sell or leave their home.
John Rother, the policy director for AARP in Washington, cautions that the fees involved with getting a reverse mortgage can be high – some $20,000 to $25,000. He also says you’re likely to get more money in your pocket if you sell the home.
“If your only objective is getting money, you’re better off selling,” Rother said. “This is not something you want to do casually – this is really more of a last resort.” Rother also pointed out a factor referred to as “longevity risk.” If you elect to receive monthly payments over a fixed period of time and that span runs out while you’re still alive, you could suddenly lose that income while still being liable for upkeep on the house, taxes and insurance.
Bob Jazwinski, a CPA and financial planner based in Hermitage, PA, says he also counsels clients to think of reverse mortgages only as a last resort. He recommends considering alternatives such as selling the home and investing the proceeds in a way to generate income.
Jazwinski says that even if you do take out a reverse mortgage, in many cases you can only draw down some 40 percent to 50 percent of the equity value in the home. The rest will go to cover interest costs as well giving the lender a cushion in case the value of the home declines.
“There is a price to be paid – and that is the interest cost of the funds borrowed, and that accumulates over time,” Jazwinski said.
