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Reverse Mortgage

Reverse mortgages are an interesting form of financing. They are popular among retired individuals who have a substantial amount of equity in their homes. With a reverse mortgage, you will be receiving a payment every month which will be added to your mortgage balance. Once you sell your house, you pay the entire loan off. Again, let me clarify using an example:

Say you bought your house for $90k when you were 40 years old. It is now 25 years later (you are still a young 65 years old), your house is worth $500k and you only have a few thousand left on your mortgage. You decide to retire, and you want some of the equity in your house (you have nearly $500k equity in your house) to provide some income for retirement. At this point, you have a few options; sell your house and pull out all your equity, keep your house and refinance or get a home equity loan to pull out some equity, or get a reverse mortgage to slowly turn your equity into income.

You decide to go with a reverse mortgage. You talk to some brokers and find that you can collect payments of about $400/month for 20 years, at which time you would owe $200k. You lock in this reverse mortgage and live in your home for another 20 years, collecting a nice $400/month the entire time. Now you are 85 and you are looking to move to a retirement community. Your house is now worth $600k and you owe $200k on your reverse mortgage. You sell the house, pay off the entire mortgage and you walk away with $400k in equity. You use that money to buy your condo in that nice retirement golf community you have always been looking at.

Here are a few things to keep in mind when shopping around for a reverse mortgage:

Most of the time, you are required to be over the age of 62.
You need to have considerable equity in your property in order to make it work.
As with any other financial tool, make sure you shop around to try and find top interest rates before locking in the loan.
Make sure to ask lots of questions so that you really understand the terms of the loan. Go over a few "what if" scenarios with your agent to help you decide what is right for you.

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