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A reverse mortgage is simply a different kind of home loan, one that is generally only available to people 62 and over. Instead of borrowing to buy a house, the homeowner gets a loan based on his or her equity in a home he or she already owns.
Say, for example, that you own a home worth $200,000 with no outstanding mortgage on it. You are nearing retirement and would like to add some extra income to your retirement savings. The bank offers you a reverse mortgage of $75,000. You can choose to receive the money in payments spread out over time--for example, monthly—or in a lump sum payment. You can also set up the loan as a line of credit that you can tap into as needed.
A reverse mortgage can be a great way to free up equity in your home to use during retirement. However, they are not always advisable. They’re probably a better deal if you are in your 70s or older rather than in your 60s, in part because the bank will likely be willing to give you a bigger loan because decisions are made based on your life expectancy.
In addition, if you expect to downsize, move closer to family or transition to an assisted-living or similar facility sometime in the future, remember that you will have to pay the loan amount back to the bank when you sell your home. That means you will have less money to spend on your next residence.
Reverse mortgages are generally made available under the U.S. Department of Housing and Urban Development’s Home Equity Conversion Mortgage Program. You can learn more by calling 800-569-4287 or going to the HUD Web site at www.hud.gov.
And be sure to contact your local CPA with any questions on important financial issues. He or she has the expertise to provide the advice you need.