If you're at retirement age and worried about how you'll pay the bills after the bear market devoured a chunk of your nest egg, you may be sitting on the solution: your home.
With a loan called a reverse mortgage, homeowners who are at least 62 years old can tap the equity in their homes to provide monthly income for life.
"Reverse mortgages can provide a lot of people with peace of mind because even when the market is down, you can secure lifetime income," said Tony Garcia, president of LibertyStreet Financial Group, a reverse mortgage lender based in Carlsbad, Calif.
The catch: Reverse mortgages have high upfront fees, so they make sense only for people who plan to stay in their homes for a long time.
Here's a rundown on what a reverse mortgage is and how you can know whether it makes sense for you:
What's a reverse mortgage?
With a normal mortgage, you borrow a set amount and then pay the lender back, with interest, over time.
With a reverse mortgage, you also borrow a portion of your home equity, either as a lump sum or in the form of monthly payments that are guaranteed to last for your lifetime. Some or all of the loan can be made through a line of credit that you draw down when you need the money.
The money borrowed under a reverse mortgage doesn't have to be paid back until either you move out of the home or you die. In the meantime, the interest that accrues is added to the loan amount. The loan, including interest and fees, is typically paid off from the proceeds of the sale of the property. Anything left over goes to you or your heirs.
What does it cost?
Plenty. Under reverse mortgages insured by the federal government, you pay an upfront insurance premium equal to 2% of your home's value (up to $417,000) and origination fees of as much as 2% of the property's value. In addition, you pay regular mortgage closing costs for such things as appraisals and title insurance, which can run $2,000 to $3,000 for an average loan. If your home is appraised at, say, $400,000, you would pay about $17,000 at closing. You also are responsible for $30 to $35 in monthly service fees.
On the bright side, you don't have to pay the fees in cash. They're generally added to the loan balance. But the fees do reduce the amount of cash you can get when you take out the reverse mortgage.
How much cash can I get on a reverse mortgage?
