What is a Reverse Mortgage? A Retirement Tool

So, what is a reverse mortgage? It can be an excellent source of supplemental income when you need it most.

A reverse home mortgage is a way to tap the equity you have in your home. You can access the equity as monthly payments, a lump sum, or with as-needed withdrawals.

At the bottom of this page there is an example from a reverse mortgage calculator.

You are not required to make payments to pay back the equity you use, although you can do so to retain equity.

Qualifying rules for a reverse mortgage are different from a home equity loan.

Income is not considered, just age and sufficient home equity.

At a future date, you or your estate will receive the remaining equity after paying back the mortgage.

The safest way to get a reverse mortgage is to find a lender who offers Home Equity Conversion Mortgages (HECMs) which are insured by the US government.

This is a must to make sure your assets are protected.

You must be 62 years old or older to be eligible for a reverse home mortgage. You must have no mortgage or a very low mortgage.

Eligible properties are owner-occupied single family residential, or owner-occupied 1-4 family properties.

Two good sources for more information on reverse mortgages are the government's HUD website or the AARP website.

What is a Reverse Mortgage: Examples

An Example Reverse Mortgage Estimate

Let's run through a scenario. Suppose at age 75, you reach a point where your income doesn't quite cover your monthly expenses, and you're faced with cutting back on important things that you really should not cut. Food, medications, or co-pays, for example. You decide to look into a reverse mortgage to see what might be possible.

In this example from the reverse mortgage calculator found on HUD's site, I used my mother's birthday and a home value of $200,000.

Reverse Mortgage Calculator Example

Check out option 3 of this estimate - it says you could have $801 per month for as long as you live in your home.

Another situation might be that your car has been less than reliable and you would really like to replace it, but you just can't afford a new expense such as a car payment. On option 2, you can get a lump sum in whatever amount you need up to $123,650. That's more than enough for a car, especially if you buy one slightly used. And you could take a vacation if you wanted to.

Alternatively, you could use option 4 for a car and take the remainder as a monthly advance.

If you plan to stay in your home, a reverse mortgage can leverage your home equity to improve your retirement lifestyle if all else comes up short. As I mentioned, you should only work with government approved lenders.

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