Housing equity put to work to loosen financial bind
Russ Wiles
The Arizona Republic
Financial advisers often talk about the three legs of retirement planning, made up of Social Security benefits, private savings and workplace retirement plans. But for millions of Americans, there’s a fourth leg: housing equity.
Your home is, most likely, your biggest asset. The trick is tapping into this wealth, if necessary, without having to find another - presumably downgraded - place to live.
The answer for some may be reverse mortgages. With these, a lender makes payments to you, backed by your housing equity. The loan amount depends on your age, housing value and other factors, with older homeowners able to borrow more. Houses, condos, townhomes and mobile homes (built after June 1976) all can qualify.
You don’t need to own your property free and clear. However, at least some reverse-mortgage proceeds must be used to pay off any existing home debts, said Dick Tannenbaum of Great Southwest Mortgage in Scottsdale.
“The reverse mortgage has to be in first position,” he said.
Reverse mortgages don’t require any income or medical qualifications, but they are limited to people age 62 and older. The loans offer flexible ways to access your cash: as a lump sum, series of fixed payments, line of credit or a combination. Proceeds are tax-free and won’t affect Social Security income.
For Imel Rowell of Peoria, a reverse mortgage helped her stave off disaster. “I’m so glad I did this. I would have lost my house otherwise,” said Rowell, a self-employed insurance agent whose financial difficulties stemmed in part from a job loss and medical problems.
She used some of the cash to pay off debts and upgrade parts of her house.
“I have financial security for the first time in my life,” she said.
With a reverse mortgage, you’ll never owe more than your home’s value. Borrowings are repaid when you move out or die. Remaining equity goes to you or your estate.
Perhaps the biggest pitfall is the cost. Origination fees, front-end mortgage-insurance premiums and other costs including credit-report fees, appraisals, title-insurance charges will tally several thousand dollars or higher.
“Costs run about $10,000,” said Jack Rohe, a reverse-mortgage specialist at Great Southwest Mortgage.
However, virtually all closing costs can be rolled into the loan. Borrowers also face interest costs, of course. Virtually all loans carry variable rates.
One unusual wrinkle with reverse mortgages is that borrowers must undergo a counseling session before closing on a loan to make sure they understand the deal and are comfortable.
Roughly 20 lenders offer reverse mortgages in Arizona, with a list and other details at www.reversemortgage.org (1-866-264-4466).
