A lengthy retirement should be relatively stress-free, but as Americans live longer, the biggest worry today is whether they will outlive their money.
“The challenge for people approaching retirement is longevity and how long they?ll live in retirement,” said Ted Provenza, a certified estate planner with The Provenza Group of Owings Mills.
Provenza says people entering retirement should have paid off their mortgage, as other expenses will tug at what will become limited income.
“Your need for income should be as low as possible,” Provenza said.
For people who still have to pay off some of their mortgage, a “reverse mortgage” is available for anyone older than 62. Reverse mortgages allow older consumers to convert the equity in their home to cash while retaining home ownership.
“The people who apply for reverse mortgages have well-defined financial needs,” said Joe DeMarkey, director of corporate development for BNY Mortgage Co. and co-chairman of the National Reverse Mortgage Lending Association.
“This allows an individual to age in place,” DeMarkey said. “With increasing medical costs and limited fixed income, people need to find other solutions, and the reverse mortgage is a very good option.”
A reverse mortgage works just as it sounds. Instead of a borrower paying a lender monthly payments, a lender pays the borrower.
The borrower receives the payments for as long as he or she is the principal owner of the home.
If the owner dies, the loan is usually paid off when the owner?s estate sells the home and forwards the money to the lender. If the remainder of the loan exceeds the amount the home was sold for, the U.S. Department of Housing and Urban Development, which insures reverse mortgages, pays the balance to the lender, DeMarkey said.
For example, if a reverse mortgage costs $400,000 and the home sells for $300,000, HUD would fund the lender the remaining $100,000, DeMarkey said.
Some downsides to a reverse mortgage, though, are that they are rising-debt loans, and interest is added each month and increases greatly over time. Also, if one wants to pass a home onto his or her children, a reverse mortgage isn?t a good alternative because the lender will get most of the equity when the home is sold.
The amount of money one can borrow in a reverse mortgage depends on a person?s age, equity inthe home, value of the home and the interest rate.
