If you are 62 or older, you may be able to convert part of the equity in your home into tax-free income without selling your home, giving up the title or taking on a new monthly mortgage payment. With a reverse mortgage, a lender makes payments to you. You can receive a lump sum, fixed monthly payments, a line of credit or a combination of these. You can use the money for anything you want—from supplementing your retirement income or covering health care expenses to paying off debts to taking a vacation.
Qualifications: There are no income, credit or payment requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage, although the reverse mortgage must be the primary (first) lien against the property. Reverse mortgages can only be borrowed against your primary residence. Eligible properties include one to four-unit homes, qualified condominiums and townhouses. Manufactured homes are eligible provided that they were built after June 1976 and are permanently affixed to the ground, and if you own the ground.
Valuation: The amount of money you can get from a reverse mortgage depends on the age of the youngest borrower, the appraised home value and your location. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.
Implications: Reverse mortgage funds are tax free and do not affect regular Social Security or Medicare Benefits. However, if you receive a lump sum payment, any amount that you retain the month after you receive the payment counts as a resource. This could affect your Medicaid eligibility, so you may want to consult a Medicaid expert.
Counseling: Before applying for a reverse mortgage, you must call or meet with a counselor who can teach you about reverse mortgages, make sure you are using an approved lender and offer alternatives depending on your situation. To reach an AARP-approved telephone counselor, call 800-209-8085.
Repayment: The loan must be repaid when you stop using your home as a principal residence. This occurs when you (or the last remaining spouse) pass away, sell the home or move out permanently. Remember that the amount owed will never exceed the value of your home. If the sales proceeds are greater than the amount owed on the reverse mortgage, the excess money goes to you or your estate.