Converting Home Equity Into Income for Retirement | Home

By BarryWaxller
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As you head into your retirement years, you need to figure out how to generate income. Reversing your mortgage is one option that has become popular, but is also very controversial.

As the name suggest, this is a loan wherein you receive payments from a lender instead of making them. The rest of the loan, however, is much different than your run of the mill mortgage.

The reverse mortgage is based on the equity in your home. Every time the lender makes a payment to you, it gets a bit of your equity. This equity is held as debt like in a traditional mortgage and interest is charged on the amount.

The first issue that arises with this program is the issue of finite equity. Practically speaking, what happens if you outlive the equity in your home? Does the lender take over the home and kick you to the curb?

When the equity ran out, the very first reverse mortgages often had clauses that allowed the homeowners to be removed from the property. Yes, it was ugly. Most current programs allow you to remain in the home, but read the fine print of yours.

If you are going to be giving away equity, what size of payments can you expect? There is no simple answer. Factors such as the amount of the reverse mortgage, your age, costs and so on all go into the calculation of the payment amount.

Finally, the biggest factor is the particular plan you choose. You will have a choice of different options that produce different payments and so on. The situation is similar to the one in which you decide upon a mortgage for a home you buy.

So, can you change your mind and go in a different direction? Yes. In doing so, however, you have to either sell your home to pay off the reverse mortgage or simply pay it off outright.

Another issue that arises is appreciation. What happens if your home appreciates over time? Can you get at the new equity? In most cases, you can. Whether this has to occur through a refinance or a modification to the reverse mortgage is a case by case decision.

If the program works well, you will pass away before the equity in your home runs out. Odd to say that, but it is true. At that time, your home will pass to your heirs who will either pay off the mortgage or sell the home.

The reverse mortgage is often touted as a great way to pull income from real estate. In truth, it is a very expensive method for doing this and there are better options. Make sure to speak with a financial advisor before going this direction.

About the Author

Barry Waxler is a financial advisor with UFCAmerica.com.

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