(Source: Tulsa World By PATRICIA MERTZ ESSWEIN) – You’re in or nearing retirement, and you’re wrestling with some tough financial issues. Perhaps you have a lot of wealth tied up in your home that you’d really like to tap to help generate retirement income. Short of selling and moving, a reverse mortgage may be the way to go.Although reverse mortgages have traditionally been the province of retirees with inadequate cash flow, more-affluent borrowers have begun to take them out, too, says Peter Bell, president of the National Reverse Mortgage Lenders Association. Many are seeking to maintain their lifestyle and aren’t worried about leaving a legacy (or the house) to their kids.
You may qualify for a reverse mortgage if you (and your co- borrower) are at least age 62 and have substantial equity in your home. Your income, assets, debts and credit score don’t matter when you apply for a reverse mortgage, and you use the proceeds to retire your current mortgage without taking on new payments.
As the name implies, the loan works like a traditional mortgage, except in reverse: The lender pays you. No repayment is due until you leave the home (if you sell the house, die or are away from home for more than 12 months – say, for a stay in a nursing home). At that point, your home will be sold and the loan repaid, and you or your heirs will receive any leftover equity. The best part is that the amount you owe cannot exceed the market value of the home when you leave it.
With the added income from a reverse mortgage, which is tax free, you might be able to delay taking Social Security until you qualify for full benefits at your normal retirement age of 66 – or even larger benefits later (up to age 70). That strategy may appeal to “accidental retirees,” who found they couldn’t work as long as they had expected, say, due to illness or a layoff.
If you take out a reverse mortgage before tapping other tax- deferred investments, such as a 401(k) or traditional IRA, you’ll probably be taking money out of a poorer-performing investment – your house – while allowing your other investments to continue to grow tax free, possibly resulting in a bigger payout from your investments later on, says Jeff Lewis, chairman of Generation Mortgage in Atlanta.
Lewis notes, however, that a reverse mortgage involves some substantial up-front costs. The amount may be justifiable if you’re going to stay in the house for 10 years or more, but it probably isn’t if you must sell the house within the first few years of tapping your home equity.
Patricia Mertz Esswein is an associate editor at Kiplinger’s Personal Finance magazine.
Source: Tulsa World By PATRICIA MERTZ ESSWEIN
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A service of YellowBrix, Inc. Publication date: 2011-08-13