These once-suspect loans can be a useful source of cash in retirement.
Financial planners have long regarded reverse mortgages as an option of last resort for cash-strapped homeowners in retirement. The loans—which let you borrow against the value of your home but don’t require repayment while you’re still living in it—have had a reputation as costly, complex products that put your family at risk of losing your home.
The stigma has lessened lately. Thanks in part to new rules for these government-backed loans, experts such as economics Nobelist Robert Merton have endorsed them, especially as a source of emergency funds. “There’s a totally different way of thinking about these now,” says John Salter, a professor of personal financial planning at Texas Tech University.
Here’s what you need to know about a reverse mortgage.
Your age is a factor. Your loan, formally known as a Home Equity Conversion Mortgage, can amount to about 50% to 70% of your home’s value, depending on your age and other variables. The older you are and the more equity you have in the house, the more you can get. A 70-year-old in a $300,000 house, for example, might be able to borrow about $173,000 before subtracting upfront costs such as a mortgage insurance premium and any balance owed on a preexisting mortgage. (Estimate your borrowing limit at reversemortgage.org.)
You’ll have a safety net. You can take the money as a monthly payment, lump sum, or line of credit to tap as needed. Financial planners say the credit line is usually your best option. You’ll pay a floating rate on the withdrawn money, now around 4%—about the same as for a traditional home-equity line of credit. But unlike the case with a HELOC, your borrowing has no set time limit. Your lender can’t reduce your credit line; in fact, it will grow over time. “Maybe you’ll never use it, but if you have a financial shock or health care crisis, it’s there,” says Salter.
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Costs have dropped. While reverse mortgages are more expensive to set up—upwards of $5,000, vs. a few hundred dollars for a HELOC—they have come down in price. In 2013 the initial insurance premium was cut to 0.5% of a home’s value, down from 2.5%, provided you limit your borrowing in year one. That’s a saving of $6,000 on a $300,000 home.
Your spouse is protected. In the past, if only one spouse was listed as a borrower and that spouse either died or moved—say, to a nursing home—the reverse mortgage had to be repaid soon or the other spouse had to move out. A new rule, implemented last June, lets a nonborrowing spouse stay in the home as long as it’s still his or her primary residence. You have to be at least 62 to take out a reverse mortgage, so if your spouse is too young to be a borrower, now he or she can’t be kicked out.
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