A reverse mortgage or home equity conversion loan pays you funds from your home’s equity, rather than you making forward payments to the mortgage. It accumulates interest, but you don’t have to make any payments until you move or you pass away and your heirs must sell the home. There is no reverse mortgage repayment requirement if you live in the home.

You and your spouse (co-borrower) must be at least 62-years old to qualify and you should have little to no mortgage left. All borrowers must prove they can afford the home’s real estate taxes, home insurance, and maintenance.

During your application process, you’ll also choose how you want to receive your reverse mortgage funds. Here are the most common options.

The lump sum payout gives you the proceeds in one payment, right after the closing. You can receive up to 60% of the home’s value, but don’t have the option to tap into the remaining 40%. The lump sum payout is the only option that offers a fixed-rate option. The fixed-rate may be higher than the initial variable rate, but in the end, it usually works out about the same.

Pros:

• You get a fixed-rate loan
• You receive all funds at once
• Provides a decent down payment if you want to use the funds to buy another home

Cons:

• You can’t touch the remaining 40% equity
• The interest rate may be higher for at least a few years
• It’s easy to blow through the funds quickly if you aren’t careful

The monthly term payout pays you a fixed monthly payment monthly for the duration of the term. You choose the term, but the most common is 5 or 10 years. Term payments offer payments higher than tenure payments (below) because the lender knows how long you’ll receive payments.

The monthly term payout is good for homeowners with a clear timeline– say you plan to move in 5 years or you want to delay receiving retirement for 5 years. The reverse mortgage funds can supplement you during these times.

Pros:

• You’ll receive a higher payout each month
• You don’t have to leave the home when the term ends
• There isn’t a lot of time for the rate to adjust too high

Cons:

• You only receive payments for a specific period
• You can’t change the mortgage if life changes (you need more money)
• You’ll have an adjustable rate

The monthly tenure payment on a home equity conversion loan pays you a portion of your equity monthly for the rest of your life. Unlike the term option, there isn’t a specific timeline, so you’ll receive smaller payments to allow the equity to last your lifetime.

You are guaranteed the same payment no matter what happens with your home’s equity. If you outlive the home’s value, you’ll still receive payments and your heirs only owe the home’s actual value when you die.

Pros:

• Provides a guarantee that you won’t outlive the funds available
• Provides a stable income for those who are in the home ‘for life’
• It’s an open-ended agreement

Cons:

• The payments are smaller than term payments because it’s open-ended
• You must stay on top of your taxes, insurance, and maintenance to keep receiving payments
• If you live long enough, you may exhaust all equity from the home

A line of credit works like a credit card. You’re issued the line, but you don’t have to use it. The money sits there untouched unless you need it. If you don’t draw on the line, no interest accrues. If you need the funds, however, you draw in the increments you need.

You can continue drawing funds as needed until you reach the principal limit. If you pay funds back, you can reuse the funds, just like a credit card. The money you leave untouched grows at an interest rate equal to the interest rate charged on your line.

Pros:

• A flexible option that allows you to draw funds as needed
• You can customize your payouts, making it similar to a lump sum, tenure, or term payout on your terms
• You only pay interest on the funds you withdraw (need)

Cons:

• It’s easy to burn through funds that you know are available
• It may take a few days to transfer the funds to your account, so don’t rely on it for emergency needs
• You’re responsible for handling the payouts

If you need a cross between a term or tenure payout and a line of credit on a home equity conversion, it’s an option too. You’ll receive a portion of your equity as the line of credit and the remainder gets divided evenly among your payments, whether a specific term or the rest of your life. To keep the line going, one borrower must continue to live in the property.

Pros:

• You can choose how much money you receive each month by supplementing with the line of credit
• If you choose a term hybrid, you’ll still have access to funds if your line is still available
• You may pay less interest

Cons:

• It’s easy to use the funds too quickly and run out of funds
• Your monthly payments are smaller
• It doesn’t work well if you need the funds as one lump sum

Choose your reverse mortgage term carefully by determining your financial needs in retirement. Think about your short and long-term goals including how long you’ll stay in the home to determine which option is right for you.

A reverse mortgage or home equity conversion is a great way to use your home’s equity without creating another financial obligation. If you’re thinking about a reverse mortgage, I encourage you to download my free book by visiting www.reversemortgagelive.com.

This is a limited time offer to get your hands on this handbook to help you understand the reasons behind taking out a reverse mortgage and realizing the benefit of it during retirement.