Are you at least 62 years of age and have 50% or more equity in your primary residence? Then the reverse mortgage, also referred to as a home equity conversion mortgage, is something you might want to think about. Reverse mortgages are not just those for those who need income supplementation in order to maintain their standard of living, but also can be used for many other useful purposes. Money withdrawn from the equity in your home via a reverse mortgage is not subject to federal income tax, since you are basically borrowing from yourself, and when the loan is eventually repaid at a sale of your residence, any gain resulting from the sale is not taxed because of the special rules relating to the sale of personal residences.
The proceeds from a reverse mortgage can be withdrawn in a lump sum, taken in periodic payments or drawn from a line of credit. Payments from a reverse mortgage can be used to (1) defer taking social security, thus increasing your social security payments when you decide to take them; (2) postpone taxable withdrawals from your retirement plan until age 70 1/2, thus allowing your retirement plan to continue growing for additional years without being reduced by periodic distributions; or (3) avoid having to sell your appreciated investments should you need income in excess of the dividends and interest generated by those investments.
A reverse mortgage is a nonrecourse loan which never has to be repaid except from the proceeds from the sale of your residence. When the reverse mortgage is applied for, the amount that can be borrowed is determined and depends on your age; whether you decide to take the reverse mortgage as a lump sum, periodic payments or as a line of credit; and the amount of equity you have in your home. Any loan encumbering the home when you apply for the reverse mortgage must be repaid, and that becomes part of the reverse mortgage loan. While interest accrues through the term of the loan, the amount that has to be repaid can never exceed the proceeds from the sale of your home. No mortgage payments are required during the term of the loan, although some types allow you to pay down the loan and reborrow later should you desire to do so. The nonrecourse aspect of the loan is paid for through mortgage insurance, with rates varying from .5% to 2.5%, depending on the amount of equity you have in your home and the amount you choose to borrow. Other fees that must be paid when applying for a reverse mortgage include standard loan fees such as closing costs and possibly, depending on the vendor, title insurance and loan origination fees; these amounts can be borrowed as part of the loan. All applicants for a reverse mortgage must be interviewed by a HUD-approved counselor, for which there is also a fee. The interest rate on a reverse mortgage can be variable or fixed; the variable rate generally allows you to borrow a greater amount.
The reverse mortgage can be used by you to buy a new “right-sized” residence provided you can come up with at least 50% of the equity in the new residence from the sale of your old residence or from other sources (but not borrowed). This can allow you to free up cash from the sale of your primary residence, or to buy a more upscale residence than your income would otherwise allow, as there would be no monthly mortgage payments. Of course, you must keep the payment of property taxes, insurance, utilities and other expenses of maintaining the home up to date, and a failure to do so could require that the reverse mortgage be repaid in full.
The reverse mortgage is repaid when the residence is sold at the later death of you and your spouse (if applicable) or within 12 months after you move from your residence, whichever occurs first. Repayment is made only from the sale proceeds, and no further payment is due even if the outstanding loan balance exceeds the sale proceeds. A reverse mortgage should not be used when you expect one or more of your heirs to inherit your house, since your heirs will inherit an encumbered property with a loan that must be repaid, and it may well be the case that there is little or no equity in residence at that time.
There are companies that specialize in reverse mortgages, such as Reverse Mortgage Funding LLC https://www.reversefunding.com/susan-feltenberger, or you may want to contact your own bank to see what products it offers.