Seniors can qualify to tap into their home's equity, but beware of pitfalls
The median home price in the U.S. (half higher, half lower) is $272,200, according to the National Association of Realtors. In some hot markets, such as New York City and San Francisco, house prices are much higher.
The problem for most people is tapping that investment.
Selling your abode and moving elsewhere is one solution, but that's a tough call for some people. If you've paid off a big chunk of your mortgage or paid it off entirely, a reverse mortgage can be a solution, but check it out carefully before you decide.
Listen: AARP podcast on reverse mortgages
Your home as a piggy bank
A reverse mortgage is a loan based on the paid-up current value, or equity, in your home. Unlike a conventional mortgage, your lender pays you — in monthly payments, through a variable line of credit or in a lump sum. You don't have to repay the loan until you sell your house, move or die.
Your balance is deducted from the proceeds of the sale when it comes due, and you or your heirs will get any money left over.
The most common reverse mortgage is a home equity conversion mortgage (HECM), which the Federal Housing Administration insures. You may also be able to get a reverse mortgage through your state or local governments or through private lenders.
The federal insurance guarantees that if the loan balance exceeds the home's sale price, your heirs won't have to pay more than 95 percent of the appraised value. Mortgage insurance pays the remaining balance.
- Types of housing. You can get a HECM on a single-family home or a two- to four-unit dwelling where the prospective reverse-mortgage client owns one unit. Housing and Urban Development (HUD)–approved condominiums and mobile homes with a permanent foundation manufactured after June 1976 can qualify, too.
- Your eligibility. To qualify for this type of reverse mortgage, you must be at least 62 years old and live in the home as your principal residence.