Getting Equity Out Of Your Home for Retirement

By: Barry Waxller

A basic staple of the financial world is you, I and everyone should buy a home. Why? Well, it is well established that a home is good investment over time, one you can use to fund your retirement years.

The traditional mortgage can be described simply. The lender issues you a bulk sum of money to buy a property. In exchange, you agree to pay back the sum plus interest over a lengthy period of 15 or 30 years.

The reverse mortgage is touted as a revolutionary new financial product. This is not entirely or even remotely true. This financial product has been around since the 1960s.

The reverse mortgage is one of the rare financial tools that allows for age bias. In fact, there is a mandatory age limit and it is legal. Simply put, you must be 62 year of age or older to apply for a mortgage.

The reverse mortgage works the opposite of a traditional mortage, but it can be hard to get your head around the concept. Essentially, the lender buys the equity in the home from you by making payments to you.

The nature of the payments, of course, is unique. You can have the lender make monthly payments to you much like you did to your original mortage lender. Alternatively, you can ask for a lump sum payment.

The good news is you need not pay back the money the lender is paying you. Instead, the lender will recover the money when the home is eventually sold. The bad news is you are limited to selling only fifty percent of the equity you have in your home.

With the massive amount of advertising for reverse mortgages available out there, you might think there are no negatives to the loan. In truth, there are more than a few and you really need to take them into account. Most reverse mortgages are not good deals.

Sometimes it is hard to see the forest for the trees. With the reverse mortgage, this has to do with the issue of what is left at the end of the process. Simply put, the lender is going to take a large chunk of the home, not your heirs.

The cost of the reverse mortgage is another big issue. Simply put, the fees are outrageous in most cases. They often run up in the tens of thousands of dollars. The interest rate on the accruing debt is also going to be higher than normal loan rates.

Ultimately, the issue of whether the reverse mortgage is a good idea is very controversial. Opinions differ, but most feel these are not good loans when compared to the many options available and you should explore those options.