If you're over the age of 62 and trying to determine how to maximize any combination of your social security, pension, IRA or 401(k) savings while still paying off a mortgage and find that the options available to you aren't allowing you to comfortably meet your monthly expenses, build a cushion for a medical emergency, or purchase that home you'd like to downsize to, you may want to consider a reverse mortgage as a short-term or long-term solution.
In a reverse mortgage, a borrower pays property taxes and homeowner's insurance, but not the monthly mortgage payment. In effect, the borrower is borrowing against the equity of his home while he is still living in it. Interest accumulates on the monthly loan balance each month, but cannot grow past the value of the home. A borrower can choose or not choose to pay the monthly interest on the loan, at no penalty.
The funds from a reverse mortgage are made available either in a fixed rate lump sum form or via a line of credit from which you can draw down as you need or wish. The entire loan does not get paid back until the last borrower on the deed leaves the property - either because he moves or dies. The loan is then paid back by the borrower or the heirs.
It is important to recognize that while a reverse mortgage is a loan, it does not operate like a traditional loan. In "How Does a Reverse Mortgage Work? The Complete Answer," Mike Branson of All Reverse Mortgage Company explains," "With a reverse mortgage, there are a number of factors input into a calculator and the borrowers' benefit amount or Principal Limit are determined based on the borrowers' age(s), the value of the home or the HUD lending limit (whichever is less), and the interest rates in effect at the time. From the Principal Limit any costs to obtain the loan are subtracted, any existing mortgages and liens must be paid in full and any remaining money is the borrowers' to do with as they please. The current HUD lending limit is $625,500."
Closing costs, loan origination fees, upfront mortgage insurance, appraisal fees and servicing fees over the life of the loan are important to consider. Read the fine print, or have someone who is not the lender help you navigate the process. Consumer Reports advises, "The reverse mortgage market makes up approximately one percent of the traditional mortgage market, but this figure is likely to increase as the Baby Boom generation--those born from 1946 to 1964--retires. That's because an increasing number of Americans are retiring without pensions and, according to the Employee Benefit Research Institute, nearly half of retired Baby Boomers will lack sufficient income to cover basic expenses and uninsured health care costs. Women, in particular, have a greater likelihood of outliving their assets due to lower savings and pensions."
As with any mortgage, reverse or not, do your homework thoroughly. The Detroit Fee Press reports, "The National Reverse Mortgage Lenders Association has maintained that reverse mortgages are legitimate tools that can help those 62 and older ease the financial burden that often exists for some after they retire."