Find out what a reverse mortgage is and who's eligible to get
one. Learn how you can use your home equity to get a reverse mortgage for more
income during retirement.
Money Girl
197 MG Advice About Reverse Mortgages
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I'm Laura Adams. If you're like me, you've probably seen TV commercials touting the advantages of a reverse mortgage. If those ads left you with more questions than answers, I bet you're not alone. So I'll shed some light on reverse mortgages by telling you what they are, who's eligible for one, and who should never consider getting one. A reverse mortgage is a loan for homeowners aged 62 or older who have equity in their home. Equity is the difference between your home's appraised market value and how much you owe on it. For instance, if your home is worth $250,000 and your mortgage balance is $100,000 then you have $150,000 in equity. It's called a reverse mortgage because a lender pays you instead of you paying a lender as with a regular mortgage. You don't need to show a minimum amount of income or even have good credit to qualify for a reverse mortgage. You just need equity in your home, but just as with a regular mortgage, you eventually have to pay back the lender for the money you borrow. A reverse mortgage can be a quick way to get money you need, for example, to make home improvements or to pay medical bills because it gives you access to a portion of your equity without you having to sell the property, give up ownership, or make monthly payments. You can get the money as a lump sum, as a series of payments, as a line of credit, or as a combination of these options and spend it any way you like. The cash you take from a reverse mortgage is tax-free and you don't have to pay it back for as long as you live in the home. That means you never have to worry about being forced out of your house because you forgot to make a monthly payment. However, once the last living borrower moves out, sells the house or dies, you or your heirs have to pay back the loan plus interest in fees. One question you may have about reverse mortgages is how they differ from regular mortgages. With a fixed rate mortgage, each monthly payment you make is made up of a principal and an interest portion. The principal part gets subtracted from your outstanding loan balance each month, which means that your debt gets a little smaller every time you make a payment. If home prices are stable, then each month your equity also gets a little bit bigger. With a reverse mortgage, this whole equity scenario is flip-flopped because you intentionally increase your debt and decrease your equity. You convert the equity that you've built up into cash while you remain the owner of your home. Your expenses don't change, you still have to pay for maintenance, property taxes and insurance, otherwise your lender could require you to pay back the loan in full. In general, the older you are and the more home equity you have, the more money you'll be eligible to receive from a reverse mortgage. But the amount you can get also depends on the specific loan program you choose, the allowable lending limits, the going interest rate and whether you already have a mortgage on your property. Reverse mortgages typically must be the only debt on your home, so if you already have a mortgage, it'll need to be paid off at closing using proceeds from the new reverse mortgage. Be aware that getting a reverse mortgage can cancel your eligibility for federal or state assistance programs such as Medicaid that are based on assets. But it doesn't affect regular benefits like Social Security or Medicare in any way. After investing billions to light up our network, T-Mobile is America's largest 5G network. Plus, right now, you can switch, keep your phone, and we'll pay it off up to $800. See how you can save on every plan versus Verizon and AT&T at tmobile.com/keepandswitch. 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It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. Learn how Capella can make a difference in your life at Capella.edu. If you think you're eligible for a reverse mortgage, use the reverse mortgage calculator at AARP.org to find out what your estimated loan advances could be. You can get a reverse mortgage from a private lender or it can be federally insured. The most well-known product is the Home Equity Conversion Mortgage, or HECM, which is backed by the Federal Housing Administration. It's generally less expensive than a reverse mortgage from the private sector, but you'll still pay a host of fees, like a mortgage insurance premium, home appraisal, title insurance, recording fees, and all the other standard loan closing costs for your area. Because of the many upfront expenses that are charged for a reverse mortgage, the longer you have it, the less it costs you over the long run. If you just need money for a short period of time or end up selling your home after just a few years, you'd probably come out ahead getting a home equity loan or a line of credit instead. However, those types of regular loans require you to have sufficient income, credit, and make monthly payments. As I previously mentioned, none of those requirements come into play for a reverse mortgage. Also, if you want to leave your home to your heirs, a reverse mortgage is probably a bad idea because in many cases the home has to be sold to pay back the loan. However, you could use the money from a reverse mortgage to purchase life insurance for your heirs, which would give them a cash inheritance after you die. A reverse mortgage isn't for everyone, but used wisely, it can be a solution for cash draft retirees who have sufficient home equity. It could help you avoid foreclosure, pay for expensive long-term medical care, or make home improvements you desperately need. It can also be a valuable planning tool for savvy homeowners who want to add to their investment in social security income during retirement. On the blog at moneygirl.quickendirtytips.com, you'll find links to everything mentioned in the show, plus additional resources. While you're there, be sure to subscribe to the MoneyGirl free email newsletter for exclusive content that isn't available anywhere else. You'll want to check out the MoneyGirl Facebook page for more tips, resources, and money-saving ideas. You'll also find me on Twitter at Twitter.com/LaraAdams and I hope you'll submit your money questions to me at money@quickendirtytips.com. I'm glad you're listening. Cha-ching! That's all for now. Courtesy of MoneyGirl, your guide to a richer life. Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. Learn how Capella can make a difference in your life at Capella.edu. When you need meal time inspiration, it's worth shopping king supers for thousands of appetizing ingredients that inspire countless mouth-watering meals. And no matter what tasty choice you make, you'll enjoy our everyday low prices, plus extra ways to save, like digital coupons worth over $600 each week and up to $1 off per gallon at the pump with points. 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