Reverse Mortgage: A Great Way to Free up your Home's Value
Today an increasing number of retirees wish to live independently and remain in their
own home. At the same time, due to financial considerations, they need to lower their
expenses as much as possible. The problem for many retired homeowners is that a large
percentage of their net worth is likely tied up in the equity in their home. This is
money that could be used for paying for medical expenses, funding a home care attendant,
making home improvements, purchasing a vehicle or paying off other debts. There are
actually several potential ways in which you can tap into the equity in your home and
receive a lump sum payment without the need to move from your home.
A solution that many retirees are using today is a reverse mortgage. A reverse mortgage
can be used for converting part of the equity in your home into cash. Depending on your
age, you could potentially free up to around 40% of your home's equity. Suppose you have
a home that is worth $300,000. With a reverse mortgage you could free up around $120,000
and use that money for whatever expenses you may have.
There are no principal payments or interest required with a reverse mortgage. The most
significant factor in determining the amount you are able to borrow is your age. In fact,
age is much more important than income level in determining the amount of money you can
borrow. After you move out of your home or after your death, the full amount that is owed
on the reverse mortgage will become immediately payable. You can choose either a variable
interest rate option or a low interest rate for a period of five years.
You should understand that reverse mortgages are final. After you sign the contract, you
will not be able to change your mind. Theoretically, if you should live long enough, the
principal amount along with accumulated compound interest that is owed on your reverse
mortgage could possibly reach the full value of your house. In that instance, you would
have zero equity in your home. Based on how long you live, you might actually have very
little equity left in your home to leave as an inheritance to your children and/or
grandchildren.
There are other options available for accessing the value of your home. One of those is
to borrow money through a home equity line of credit. The key to keep in mind with this
option is that you will then need to pay back loan and will be responsible for making
monthly payments. The principal that is owed on a home equity line of credit would not
become automatically payable once you move out of your home; however. Another benefit
of a HELOC is that it is more flexible than the reverse mortgage. You will need a good
credit rating to qualify for this type of loan.
Yet another option would be to make pre-arrangements for the title of your home to be
transferred to your favorite charity after your death. This type of gift of residual
interest could provide you with a charitable donation receipt, allowing you to make
withdrawals with the knowledge that the tax credits related to your charitable donation
would eliminate the majority of your income tax on the withdrawals you make. Of course,
you should contact a financial advisor to be certain of all of the restrictions and
terms with this option.
You might also consider selling your home to one of your children for an agreement for
sale. In this option, you would negotiate a schedule of payments. You would not even need
to charge any interest. At the time of your death, the agreement would then become an
asset that would be divided among all of your children as part of your estate. The title
would not be transferred to the child that purchased the home until the final payment had
been received. If you decide to go with this option, be sure to consult an attorney for
legal advice regarding your home's title.
Whatever decision you make, be sure to discuss your personal situation and goals with your
accountant and/or financial advisor. You might very well find there are viable alternative
methods that will allow you to obtain the cash you need and still remain in your home
during your golden years without having to worry about moving out or how you will pay
your bills.
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