During the real estate boom of the last few decades many find themselves with inadequate retirement savings but a beautiful home that is paid off (or substantially). But how do you generate an income flow from your home without selling or renting? You may be thinking of those commercials on TV with the slogan “Wouldn’t it be nice…?”
A reverse mortgage is simply a loan against your home. You receive a lump-sum payment and do not have to pay the funds back or make any interest payments as long as you live in the home. However, when you do decide sell (or die) the loan must be paid back with accumulated interest.
Assuming home prices increase 4% over time the net equity of the property will continue to increase. However, if the increase in property values over time falls, your equity may decline.
The interest rates charged by the reverse mortgage may be competitive but there are other fees involved that can increase the overall cost of the reverse mortgage.
Alternatives To Reverse Mortgages
A home equity line of credit or HELOC. Many lenders will provide a line of credit against the value of your home. While you will be required to make regular interest only payments, you may be able to access more funds than from a reverse mortgage.
For example, an 80 year-old seeking a reverse mortgage on a $300,000 property would receive approximately $145,000. The $145,000 would increase over time and may reduce the net equity in the home over time.
Alternatively, a HELOC may be obtained for the same amount and rates would be lower. However, interest payments would be required.
Rent or Downsize. If you were to sell your home and rent, you may be able to have an income stream of over $35,000 per year for 10 years (the taxable portion would be less than have and would decline annually based on an annuity calculation). This additional $35,000 may provide sufficient income to secure a rental property for the balance of your life.