How is the market? Reverse mortgages can provide the cash you need – Lake County Record-Bee
Did you know that when you are 62 or older you can use a reverse mortgage to borrow against the equity of your home? Instead of making mortgage payments, the bank pays you either lump sum, monthly, or a line of credit – and as long as you live in the house, you don’t have to repay the loan.
With a reverse mortgage, you still retain ownership of your property. Lenders simply add a lien to the title to ensure they can recoup the expenses after the loan is repaid (usually when the last borrower dies and the heirs sell the property). This is the same type of lien that lenders use on conventional loans.
Who Can Benefit From A Reverse Mortgage? Generally anyone who is 62 or older with some equity in their home. Specifically 1. Anyone 62 or older who owns their home directly (or has a lot of equity) and needs a large injection of cash. 2. Anyone 62 or older who wants to raise their standard of living beyond what their pension, 401K, and / or social security income can provide. 3. Anyone who is 62 or older and wants access to cash at all times to take advantage of income opportunities or cover unexpected expenses. With reverse mortgage loan, the money can be used as you see fit. (I don’t recommend going to Vegas, but legally you could.) The reverse mortgage loan amount depends on how much equity you have in your home and how old you are.
For a large injection of cash, your lender would structure the loan so that you receive a single lump sum payment. The balance of the loan will increase with accrued interest over the life of the loan and eventually the loan will have to be paid back, but until you move out of the home or die, the loan will not have to be paid back. Note that you can also use a reverse mortgage to buy a home.
To increase your income, your lender would set up an annuity to give you monthly payments. The amount you receive each month depends on your age and your equity. Like insurance companies, lenders hire actuaries to estimate life expectancy. You take some risk because even if you turn 106 you will have to keep paying the agreed monthly amount even if the market value of the property cannot cover the loan.
Even if the total debt exceeds the current value of the home or the home value falls, your children or beneficiaries will not be able to pay the difference between the loan amount and the current value of the home. Of course, since you’ve traded your equity for cash, unless they repay the loan, the property is more likely to go to the bank than your heirs after your death. If the property’s value increases sufficiently over time, the remaining proceeds would go to your estate after the house is sold and the reverse mortgage is paid off.
To create a Rainy Day fund, your lender would extend a reverse mortgage line of credit. This is my preferred option. I like it because you only draw what you need when you need it. And you can reduce the amount borrowed (and associated interest) by paying back the line of credit if you have the funds and the will to do so. Be sure to check the interest rate and make a note of whether it is fixed or floating so you don’t get any unpleasant surprises.
In any real estate transaction, I always say, “The large print gives and the small print takes.” Read the entire agreement, especially the small print. If you have any questions, contact your accountant or financial advisor.
If you have any questions about property management or real estate, please contact me at [email protected] or by phone at (707) 462-4000. If you have an idea for a future column let me know and when I use it I’ll send you a $ 25 gift certificate to Schat’s Bakery. To see previous articles, visit www.selzerrealty.com and click “What’s the Market”.
Dick Selzer is a real estate agent who has been in business for more than 45 years.