Turn home equity into income in retirement

By Sandra Block

Kiplinger’s Personal Finance

In some high-cost parts of theUnited States, the homes seniors bought years ago for a modest amount are nowworth $1 million or more.

But owning ahomeworth $1 million isn’t the same as having an equivalent amount of money in the bank. To cash in on the rise in your home’s value, you usually need to sell— somethingmany retirees are reluctant to do. And while looking up your address on Zillowmay make you feel rich, an increase in your home’s value typically means higher property taxes and potentially higher homeowners insurance premiums, too. Modifications tomake your home more senior-friendly could put additional pressure on your finances.

Areverse mortgage is oneway to solve this problem. With a reverse mortgage, you can convert your home equity into a lump sum, monthly payments or a line of credit. But unlike a traditional mortgage or home equity line of credit, you don’t have tomake principal or interest payments on the loan for as long as you remain in the home.

To be eligible for a government-insuredhome equity conversion mortgage (HECM), you must be at least 62 years old and have at least50% equity in your home, and the home must be your primary residence. Themaximumpayout for which you’ll qualify depends on your age (the older you are, the more you’ll be eligible to borrow), the current interest rate and the appraised value of yourhome. You can estimate the value of a reverse mortgage on your home atwww.reversemortgage. org/about/reverse-mortgage-calculator.

Themaximumamount you can borrow through aHECMis adjusted annually, based on home prices in the preceding year. In 2023, themaximumamount you can borrowthrough aHECMis $1,089,300, up from$970,800 in 2022. A HECMis a "nonrecourse" loan, which means the amount you or your heirs owe when the home is sold will never exceed the value of the home. As long as you remain in the home, you retain ownership, but you’re responsible for paying taxes and insurance and maintaining the property.

You may qualify for a reverse mortgage if you still have an existing mortgage, but you must pay off the balance with funds fromthe reverse mortgage or other sources, such as your savings. This is probably the primary reason seniors on a fixed income apply for a reverse mortgage, says Steve Irwin, president of theNationalReverseMortgage Lenders Association. Eliminating themortgage payment "has a huge positive impact on a retiree’s cash flow," he says. Still, it’s important to understand that paying off an existing mortgage with funds fromthe reverse mortgage will reduce the money available to you fromthat loan.

Reverse mortgages aren’t as attractive as theywere a year ago, wheninterest rates were at record lows. Whenrates rise, the amount you’re able to borrowdeclines.

One drawback to taking out a reverse mortgage is the upfront costs, which may include up to $6,000 in fees to the lender, 2% of the loan amount for mortgage insurance, and other fees. These costs can be rolled into the loan, but that will reduce the proceeds available to you.

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