Retirement Income Options: Reverse Mortgage
Planning for retirement income sources is important no matter your age. A combination of good investments, retirement savings and other programs can help you live your best possible life when you reach retirement. And the best way to have a good retirement income is to plan for one for exploring your options now, and deciding how you want to keep up income while you are retired. One retirement income option is the reverse mortgage. These are becoming quite popular now because they provide retirees with a tax-free income.
What is a reverse mortgage?
A reverse mortgage is what it sounds like: instead of you making mortgage payments on your home to the bank, the bank makes mortgage payments to you. So, in order to get a reverse mortgage, you need to own a house, and the home has to have equity. You also need to be at least 62 years old. Even if you still have a mortgage on your home, it is possible to get a reverse mortgage. However, you will have to use the reverse mortgage to pay off your existing home loan. For example:
If you still owe $50,000 on your home loan, but your home is worth $150,000, the reverse mortgage would pay off the $50,000, and you would be left with $100,000.
Getting the money from your reverse mortgage
You can get your money from your reverse mortgage in three main ways:
- Lump sum payment: You can get the entire value of your home at once, and then use it how you like.
- Monthly payments from the bank: Instead of getting the entire amount of your reverse mortgage at once, you can receive it installments. This can be monthly payments, or it can be arranged as quarterly or some other periodic installment. This is a way to have a steady income for a period of years. Usually, a lifetime agreement works out, as you can arrange for the payouts over 30 years.
- Line of credit: This is the most popular way of receiving reverse mortgage money. Basically, a line of credit with the maximum you can borrow (the worth of your house) is set up. You can tap into it whenever you want, for whatever you want it for.
How is a reverse mortgage paid back?
The beauty of a reverse mortgage is that you do not need to make payments to pay it back. When the house leaves your possession -- whether you sell it or pass on -- the proceeds from the sale of the house pay back the reverse mortgage. Because a reverse mortgage should not exceed the value of the house, this is usually not a problem. And if the bank lends you too much, then that is the bank's problem. If the proceeds from the house are more than what has been paid to you in the reverse mortgage, the left over goes to your estate. The main drawback to a reverse mortgage comes in the form of inheritances. If you want your home to stay in the family, or if you want the proceeds to benefit your heirs, then a reverse mortgage would not be a good idea.
If, though, you feel as though it's about time your house started working for you, a reverse mortgage is a good idea. Even if you are not near retirement now, you can plan for a retirement income with a reverse mortgage by working on ensuring that your home builds equity.
