Using home equity is last resort option for funding retirement
STILLWATER, Okla. – With people regularly living well into their 80s and 90s, many Oklahomans have a good shot at spending almost as much time enjoying the golden years as they did racing through the working ones. But what happens if, at some point, retirement income does not keep up with expenses? What if you are worried about financing long-term care or paying for a major home repair?
In these cases, older adults may consider a reverse mortgage
“Your house is a real, tangible asset, and it can represent a source of retirement income,” said Eileen St. Pierre, Oklahoma State University Cooperative Extension personal finance specialist. “But you only want to use your home to generate income as a very last resort.”
Reverse mortgages allow homeowners to convert the equity they have built up in their homes into cash. The value of a home’s equity is equal to the home’s current market value minus any outstanding mortgages or liens.
“This strategy can be effective but it should only be used in certain situations. You need to consider the costs and benefits of a reverse mortgage and make an informed decision,” St. Pierre said. “Do a thorough analysis of your monthly budget first. You may be able to find ways to cut expenses and avoid this more extreme option.”
A reverse mortgage is a special type of home loan available to older adults aged 62 and over who own their homes or have a large equity stake. The lender does not consider your credit worthiness. Most reverse mortgages are referred to as Home Equity Conversion Mortgages (HECMs), and are available through the U.S. Department of Housing and Urban Development and sponsored by the Federal Housing Authority. Reverse mortgages are very complicated so HUD requires counseling before applying for a HECM.
You make no payments – instead the lender pays you. You can receive your money in a lump sum, through a line of credit, monthly payments for life or monthly payments for a fixed period of time. These payments are generally tax-free and do not affect Social Security or Medicare benefits.
“A reverse mortgage is a non-recourse loan, which means you will never owe more than your home is worth,” St. Pierre said. “However, interest and fees, which can be very high, are added on to the loan balance over time, causing your available home equity to go down.”
Repayment of the loan balance is required at the time of the (youngest) borrower’s death, when the house is no longer the borrower’s primary residence or when the home is sold. When the home is sold, the proceeds are used to pay off the loan. Any leftover money goes to the surviving owner or estate.
Borrowers still need to pay property taxes and insurance and maintain their homes. Failure to do so could cause the loan to become immediately payable and possibly lead to foreclosure.
“Reverse mortgages can be the right choice for those who want to stay in their homes for the rest of their lives, are in generally good health and can maintain the property,” St. Pierre said.
Just remember that if you need to move later in life you may not have enough home equity left to help pay for the move. Also, make sure your children understand this loan will affect their inheritance.
For more information on reverse mortgages, St. Pierre suggested reviewing the Oklahoma Cooperative Extension Service factsheet, “Reverse Mortgages and Other Uses of Home Equity” (T-5137) at http://osufacts.okstate.edu or contacting your local county Extension office.
“This is a big decision so ask for help from a trusted financial advisor. There may be other ways to help you with your monthly expenses such as assistance with property taxes and utility bills,” she said.
Oklahoma State University, U.S. Department of Agriculture, State and Local Governments Cooperating: The Oklahoma Cooperative Extension Service offers its programs to all eligible persons regardless of race, color, national origin, religion, gender, age, disability, or status as a veteran, and is an equal opportunity employer.
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