Reverse Mortgages: 3 Ways You Can Tap Home Equity to Enhance Your Retirement
You may have heard of reverse mortgages as a way for seniors to tap the equity in their homes to pay for living expenses, but there are other ways that homeowners are using their homes to get by.
Many seniors are on fixed incomes, with Social Security payments providing a significant portion of their monthly income. In fact, Social Security provided at least half of total income for more than half of aged couples and nearly three-quarters of non-married beneficiaries in 2010. And it provided 90 percent or more of income for 23 percent of aged beneficiary couples and 46% of aged nonmarried beneficiaries. The average monthly benefit at the beginning of 2012 was $1230. It's no surprise, then, that reverse mortgages are often used to help cover essential living expenses.
What you may not have heard, though, are some of the creative ways homeowners are using reverse mortgages to help them navigate today's challenging economy.I recently interviewed Russell Silver, senior residential mortgage consultant for US Mortgage Corporation, on my radio show "Talk Credit Radio." (The firm also sponsors some of the show's podcasts). Following is an edited excerpt from that interview.
First, the basics. "A reverse mortgage is a federally-insured mortgage, only available to homeowners 62 years or older," explains Silver. "Basically a reverse mortgage is just what it sounds like: You do not make payments. As long as you own your home you're not obligated to make any mortgage payments, you're only required to pay your taxes and your homeowner's insurance."
"If you have a mortgage on the property currently and do a reverse mortgage, the old mortgage is paid off, and a new reverse mortgage is put in place. Whatever you want to use the money for, you can use it and nobody's going to tell you what you can do and can't do with the money."
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Here are some ways his clients, and other homeowners, are using reverse mortgages:
1. Have a say in how your heirs spend their inheritance.
If you're like many seniors today, the equity in your home will be a major part of the inheritance you leave your heirs. As much as you hope that money will be put to good use, there's often a nagging worry that it will be wasted. Maybe you're worried that your granddaughter will use it for that plastic surgery she's been hinting about. Or that your money will end up in the hands of your son's freeloading girlfriend.
Or maybe you'd just like to see your kids and grandkids enjoy your money now rather than after you are gone. A reverse mortgage may help you accomplish that. Silver explains:
I can't even tell you how many grandparents or even parents we speak to that want to take out a reverse mortgage to help out their kids. A lot of people use it for their kids' or grandkids' college educations. One couple took their entire family on a cruise for their 50th wedding anniversary. It was something they never ever would have been able to do otherwise.
2. Take care of yourself.
It's no secret that rising health care costs are squeezing many seniors' budgets. You, your parents or grandparents may worry about the costs of prescriptions and copays, and be downright terrified that you won't have the money you need for more intensive care. Silver explains how some are using a reverse mortgage to fill the gap:
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One of the most important things that clients are using these loans for is long-term health care. When you get older, you might want to live out the rest of your life in your home, and maybe get a home attendant or nurse.
It's very easy for the kids to say 'don't worry, we'll take care of you' but when people get sick, you have not only the expense but are you able to take time off from work, to care for people? It's not easy especially if you have family where maybe mom and dad lived in Florida but the kids are up north. How is this going to be done?
One of our clients lives quite a distance from her daughter and decided to get a reverse mortgage so she can ensure her health care needs are taken care of without becoming a burden to her daughter.
Some homeowners use the proceeds of a reverse mortgage to purchase long-term health care insurance or to hire the help they need to stay in their homes.
3. Get out of foreclosure.
It sounds counterintuitive that someone who is in foreclosure can use a reverse mortgage to get out of foreclosure. But Silver says it's being done all the time. He explains:
One of the great things about the way the government set this program up is that there are no credit requirements. You can be in foreclosure or you may just have completed a bankruptcy, and you can still qualify.
Basically, this works for someone who has equity but can't afford to make the payments anymore. They take out a mortgage that will pay off the bank that's foreclosing. And now they go forward with no payment for the rest of their life, as long as they live in that house. (Homeowners must continue to pay taxes – if required – and insurance, however.)
We speak to so many bankruptcy attorneys, foreclosure attorneys, real estate attorneys or financial planners or accountants that have clients that really are in trouble at this point and they need help and this is a great way out."
To help protect seniors, the government instituted mandatory, independent reverse mortgage counseling. Anyone considering a reverse mortgage must get this counseling before obtaining a reverse mortgage.
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