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Converting Home Equity Into Income for Retirement

Apr 7, 2008
As you head into your retirement years, you need to figure out how to generate income. Reversing your mortgage is one option that has become popular, but is also very controversial.

As the name suggest, this is a loan wherein you receive payments from a lender instead of making them. The rest of the loan, however, is much different than your run of the mill mortgage.

As payments are made to you, more and more of the equity in your home is converted into debt. That debt grows at an interest rate that is typically one to two points higher than a normal mortgage or refinance.

The first issue that arises with this program is the issue of finite equity. Practically speaking, what happens if you outlive the equity in your home? Does the lender take over the home and kick you to the curb?

In the past, the ugly answer is that you would lose the home. Since senior citizens sitting on a curb did not go over well, the government stepped in. Most plans now allow you to stay in the home even if the equity is used up entirely.

Another common question is how big will the monthly payments made by the lender be? There are a number of factors that go into the determination. These include the amount of equity in your home, the interest rate charged on the loan, the costs and the fees.

If this sounds too vague to you, don't worry. One of the biggest factors is the program you choose. There are different ones offering different payment amounts. You can even take lump sum payments in some cases.

What happens if you realize you should have gone in a different direction? Can you refinance your home to get out of the loan? Yes, so long as you pay off the amount due on the reverse mortgage. Make sure to check the fine print for prepayment penalties.

Another issue that arises is appreciation. What happens if your home appreciates over time? Can you get at the new equity? In most cases, you can. Whether this has to occur through a refinance or a modification to the reverse mortgage is a case by case decision.

What happens when I die? The reverse mortgage is handled no different than any of your other assets. It becomes due. This means your heirs must either pay it off or sell the property. If they sell the property, the reverse mortgage balance is paid off.

The reverse mortgage is often touted as a great way to pull income from real estate. In truth, it is a very expensive method for doing this and there are better options. Make sure to speak with a financial advisor before going this direction.
About the Author
Barry Waxler is a financial advisor with UFCAmerica.com.
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