Americans have learned a tough lesson: Your home is not your piggy bank. However, there is a reward for those who did build equity in their homes: In their senior years, their home can provide a monthly stream of tax-free income, or a lump sum of cash to spend as they wish, while remaining safely in their home. Or it can provide a source of financing for a new, smaller home.
It's all done through a reverse mortgage.
For many seniors, a reverse mortgage is the answer to a prayer. It allows you to withdraw money from your home equity, tax free, with no requirement that it be repaid until you die or move out of the home. There is no way you can be forced out of your home as long as you keep paying your property taxes and insurance and maintain the property.
Reverse mortgage basics
First, let's look at the basic reverse mortgage that can be used by people age 62 or older who have paid off their mortgage completely or have only a small balance remaining. A participating lender, such as a bank or mortgage company, will process the paperwork and give you a choice of ways to receive the money:
— You can take out one lump sum.
— You can get a fixed check each month for as long as you live in your home.
— You can opt for a fixed check for a set number of years, perhaps just long enough to pay off your vacation condo.
— You can get a line of credit against the equity in your home, which you can draw down as needed.
The Federal Housing Administration insures these mortgages, which means your future stream of monthly checks or line of credit funds is guaranteed to continue as long as you live in the home.
The size of your lump-sum distribution or lifetime monthly check is determined by three factors: the current appraised value of your home, your age and the current level of interest rates. The maximum amount of home equity that can be tapped for a reverse mortgage is $625,500 (through 2009).
For many people, it's difficult to conceive of taking money out of your home without having a liability to make payments on that debt. And federal regulations require you to be counseled by an independent adviser so that you will understand how this product works.
Here's an example of how a reverse mortgage might work:
A 65-year-old homeowner with a home appraised at $500,000 could receive either a lump sum of $238,139, net of all fees, or a line of credit for that amount.
Or that 65-year-old homeowner could receive a monthly check of $1,546 for as long as he lives in the home. A 75-year-old could receive a lump sum of $295,607, or a $2,135 monthly check. You can do anything you want with the money.
Interest is accruing on the amount that is withdrawn. But instead of paying it on a monthly basis, it becomes part of the balance due when you leave the home. (Remember, the total of your withdrawals and interest can never exceed the value of the home when it is sold.) At that point, any remaining balance goes to you — or your heirs. Or your heirs can choose to keep the house and take out a new mortgage to repay the reverse mortgage loan balance.
If you move out of your home for longer than one year, it can be sold, unless your spouse and co-owner is still living there. But if you just go to Florida for the winter, or spend time in a hospital, or have a short stay in a nursing home, you don't have to worry about your house being sold out from under you.
Fees on reverse mortgages can be substantial and mostly are determined by the FHA, but they are calculated into the amount you can receive in your monthly check or lump-sum withdrawal.
There are many accredited reverse-mortgage lenders, and you can search them out at www.reversemortgage.org or at www .financialfreedom.com, one of the largest national lenders that provided the numbers for this column. And it should be noted that those are approximate numbers, which could change along with the current level of interest rates.
If you or your parents were smart enough to pay off all or most of your mortgage, you can safely use your own home equity to help your retirement lifestyle through a reverse mortgage. And that's The Savage Truth.