What is a Reverse Mortgage?

One of the more intriguing retirement planning options is the reverse mortgage. This is basically a home loan taken out on the equity of your home, but instead of you making payments on it, the bank makes payments to you. For some, this can be a source of retirement income from the real estate they own. However, it is important to note that a reverse mortgage is still a home loan, and it will eventually need to be paid back, usually from the proceeds for the sale of your home.

Getting retirement income from your home equity

Many retirees have their homes paid off. They may be what is known as "house rich but cash poor." Retirement planning options allow for you to take advantage of everything you put into your home. You can get a set amount for your home, and the bank will make payments to you monthly, quarterly, or even in a lump sum. If you are looking for steady income from a reverse mortgage, you should consider a monthly lump sum. You can work out how long the payments will be made, and in what amount, based upon the equity in your home. The idea is that when the home is sold, the proceeds will pay off the home loan.

Things to keep in mind when getting a reverse mortgage

Make sure that your reverse mortgage has a "norecourse" clause. This means that you or your heirs is not responsible to repay more than the value of your home. If an eager loan officer grants you a reverse mortgage at 125% of equity, if the home does not appreciate in value, the bank loses out, not you or your heirs.

Remember that the reverse mortgage has interest charges, origination fees and all the other fees that come with a home loan. Also, you are still responsible for paying property taxes, insurance premiums and all of the other trappings of home ownership. You are just receiving payments for the value of your home. The home is still yours; a reverse mortgage does not transfer ownership.

If you are not worried about leaving your home to your heirs, you can get a reverse mortgage for 30 years or so when you retire. You will receive monthly income, and the home loan does not need to paid off until you die (or are in a nursing or care facility for 12 months). Before you sign the dotted line, however, make sure that you understand the terms of the reverse mortgage, and that it is the right retirement planning decision for you.