FOR MANY AMERICANS, THE EQUITY IN THEIR HOME is their biggest retirement planning asset. Many folks who are entering retirement will sell their home to cash in on the equity they have built up over many years of ownership. Often, retirees will sell their homes in high-cost areas and relocate to lower-cost areas where their retirement housing dollars will go further.

Recent surveys seem to indicate, however, that a majority of baby boomers have deep roots in their current neighborhoods and do not plan to relocate when they retire.

The reverse mortgage is a retirement planning option retirees are turning to in growing numbers to tap the equity in their current homes without selling and relocating. Some use the reverse mortgage to stretch their retirement home purchase dollars.

The reverse mortgage is not a new program; in fact the staple of the industry, HUD’s Home Equity Conversion Mortgage, has been around since 1989. Even though this program has been around for many years, there remain widespread misconceptions of the benefits and risks for folks considering it as a retirement planning tool.

Simply put, a reverse mortgage allows an eligible homeowner to borrow against a portion of the equity in their home. The homeowner does not have to make any payments on this loan as long as they live in the home. The interest on a reverse mortgage accumulates over the life of the loan and is paid, along with any principal borrowed, when the last remaining borrower permanently moves out of the property.

Homeowners receive their proceeds from a reverse mortgage in the form of a line of credit, lump sum or by monthly payments they receive from the reverse mortgage lender. Typically, most borrowers will have their loans structured to receive their proceeds with a combination of two or three of these options.

The title to the property remains in the name of the borrower since the reverse mortgage is simply a loan secured by the property. The homeowner must maintain the home and keep their property taxes and insurance current just like any other home loan.

Many seniors considering a reverse mortgage are concerned about leaving debt to their children, or worse, somehow being kicked out of their home by the bank. But the reverse mortgage is just like any other home loan and is secured by the property. If the loan balance is higher than the value of the property when the last remaining borrower permanently moves from the property, the borrower or their estate is protected and can never owe more than the value of the property.

Just as importantly, as long as the homeowner living in the property maintains it and keeps their property taxes and insurance current, they can never be foreclosed upon or kicked out of the property.

Typically, qualification for a reverse mortgage is fairly straightforward. The borrower must live in the home and be at least 62 years of age. Currently there are not any income or credit qualifications, but this is about to change and borrowers soon will need to be able to document their ability to maintain their obligations of insurance, maintenance and property taxes.

As a safeguard to insure borrowers have an understanding of the reverse mortgage, borrowers must also complete mandated counseling by a HUD-approved counselor.

Reverse mortgages are an excellent planning tool for many retirees. Once thought of as a “loan of last resort,” these loans are gaining popularity and greater acceptance.

Of course, as with any complex financial transaction, it is important to do your homework and make sure you have a clear understanding before signing on the dotted line.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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