Reverse Mortgages to the Rescue
New reverse-mortgage rules let you squeeze more cash from your house and even buy a new home.
Reverse mortgages have been around for nearly 20 years, but it wasn’t until the current financial crisis that they caught on. Seniors are turning to these loans to tap the equity in their homes and generate tax-free income to help them ride out hard times.For Frank and Carol Rider, a reverse mortgage is providing a cushion, giving their investments time to recover from the bear market. The Riders, both in their early seventies, borrowed about $200,000 against their home in New Mexico. They used the money to pay off their traditional mortgage and to take $1,500 a month for the next 20 years to supplement their pensions and Social Security benefits. “We’re trying to maintain our lifestyle,” says Frank, noting that he and Carol travel extensively year-round.
For Luther and Peggy Combs, their reverse mortgage is a lifeline that saved their home from foreclosure. The Combses, both in their early sixties, had high hopes for a comfortable life when they moved from Chicago to central Florida a few years ago. But Luther lost his job when the economy soured, and the couple found themselves deeply in debt. Although they had to use every penny of their home equity to pay off their bills, the reverse mortgage wiped out their monthly house payments and made it easier for them to sleep at night.
You can take it with you
A reverse mortgage can be a good option for people who want to relocate or move to a smaller home but who don’t want to sink all their cash into a new house or who may not qualify for a traditional mortgage. In the past, the only way they could take out a reverse mortgage was to stay put. But new rules that took effect in January allow seniors to use a reverse mortgage to buy a new home. Say you own a house in Massachusetts worth $500,000 and you want to buy a $400,000 house in Florida. If you were to sell your house and pay cash for your new home, you’d have just $100,000 left to add to your savings. But now you can take out a reverse mortgage on the new home. For example, if you took a $100,000 reverse mortgage on the Florida house, you’d have twice the amount left--$200,000—to add to your savings.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How it works
You must be at least age 62 to take out a reverse mortgage. Plus, your house (current or future) must be your primary residence, and your mortgage must be either paid off or have a small balance. Unlike a traditional loan, there are no income or credit-score requirements, and you may use the money as you wish. The older you are, the higher the appraised value of your home (up to the maximum federal loan limit) and the lower the interest rate, the greater the amount you can borrow. As part of the economic-stimulus package, Congress raised the reverse-mortgage loan limit to $625,500 through the end of 2009. After that, the lending limit reverts to $417,000, unless Congress intervenes. As a rough rule of thumb, a 65-year-old might be able to borrow up to 35% of a home’s value, says Eric Bachman, founder of Golden Gateway Financial, a reverse-mortgage lender in Oakland, Cal. The percentage rises to 45% for a 75-year-old, and 55% for an 85-year-old. (To get a personalized estimate of how much you can borrow, go to www.goldengateway.com.)
You can take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or a combination of all three. No repayment is due until the last homeowner moves out or dies, at which point the home can be sold to pay off the debt. The loan repayment can never exceed the home’s market value (even if it declines), absolving your heirs of any liability.
High fees
Your personal “bailout plan” won’t come cheap. You’ll pay the usual closing costs, plus loan-servicing fees, an origination fee of up to $6,000 and interest over the life of the loan. But what makes a reverse mortgage really costly is an initial insurance premium equal to 2% of the home’s value (up to the reverse-mortgage loan limit) plus 0.5% per month of the mortgage balance. (The Federal Housing Administration insurance protects you and the lender if your home value declines and ensures that you won’t owe money if the loan balance exceeds the home’s value.)
On a $200,000 loan, the upfront costs could exceed $20,000, says Jeff Lewis, chairman of Generation Mortgage, in Atlanta. So a reverse mortgage makes sense only if you plan to stay in your house for several years. But if you do, now could be a golden opportunity for owners of high-priced homes. Interest rates are at historic lows and loan limits may never be as generous, boosting potential payouts. And, says Lewis, “Once you lock in a reverse mortgage, declining home values don’t matter.”
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
403(b) Contribution Limits for 2024
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Published
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Published
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Published
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
By Jackie Stewart Published
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published
-
Roth 401(k) Contribution Limits for 2024
retirement plans The Roth 401(k) contribution limit for 2024 is increasing, and workers who are 50 and older can save even more.
By Jackie Stewart Published
-
Four Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
Five Ways to a Cheap Last-Minute Vacation
Travel Procrastinator? No matter. You can pull off a fun and memorable getaway on a moment's notice — without breaking the bank.
By Vaishali Varu Last updated