Home equity release arrangements, such as "reverse mortgages," can be useful tools for retirement planning. Before entering into such an arrangement, however, you need to understand that there are both advantages as well as disadvantages.
What is a reverse mortgage?
A reverse mortgage, sometimes referred to as a "lifetime mortgage," is simply a loan secured by your primary residence which is repaid after you die.
How do reverse mortgages work?
You will own the property subject to the reverse mortgage during your lifetime, but when you die it will be sold, with the proceeds used to repay the loan. To the extent that the sale proceeds exceed the amount required to repay the loan, the surplus will form part of your estate (and be distributed in accordance with your will or, if you do not have a will, the intestacy rules).
The reverse mortgage loan can be paid in installments or in a lump sum, which you can invest or use to buy an annuity.
Although you can usually obtain a reverse mortgage without having to prove that you have an income, there is ordinarily a minimum age requirement. In most instances, you will need to be at least 62 years old to obtain a reverse mortgage.
Some points to consider
Unlike a traditional mortgage, where you borrow money and as you repay it you accumulate equity in the mortgaged property, you do not repay a reverse mortgage during your lifetime. Instead, you swap equity in your property for a lump sum of cash or a stream of cash payments.
If you're thinking about a reverse mortgage, you also need to consider other estate planning issues. For instance, if you want to leave your house to someone in your will (e.g., a co-habitee or a relative), a reverse mortgage will probably mean that you have to change your plans.
In addition, if you're married there are a number of ramifications of a reverse mortgage. For example, will you be joint borrowers? Or will one spouse be exposed to the risk that he or she will lose the house when the other spouse dies?
[Continued in What Everyone Needs To Know About Reverse Mortgages - Part 2]