A reverse mortgage could be the way to a lot more extra cash for an elderly widow whose home is paid off but who lives month-to-month, writes a CNN Money column this week.
Responding to an inquiry published in Money Magazine regarding a reader with a widowed relative with a savings account of $30,000 and a home valued around $150,000, a reverse mortgage may be the way to go, CNN says. Investing the savings in annuities could present more risk, the article advises. Instead, a reverse mortgage could help.
Your elderly relative has a chance to get a lot more extra cash, however, by tapping the $150,000 of equity in her home.
She can do that by taking out a reverse mortgage, which would give her either a lump sum, monthly payments or a line of credit or a combination of these options.
The amount of money you can get from a reverse mortgage varies based on where you live, the value of your home and your age. A 75-year-old with a home worth $150,000 that has no mortgages or liens might qualify for a reverse mortgage of up to $100,000 or so.
The upside: Your relative can get the cash now and won’t have to repay the loan until she dies or moves out the house. But there are also some drawbacks.
One is cost. Reverse mortgages come with some pretty substantial fees. Even though you don’t have to pay them upfront, they drive up the effective interest rate on the loan, especially if you die or move out of the home shortly after taking out the loan. A relatively new variation on the standard reverse mortgage comes with lower costs, but the tradeoff is that you get a smaller loan.
Reverse mortgage borrowers are also required to pay homeowners insurance premiums and property taxes and keep the house in good condition. If that would be a problem for your relative — or if she was hoping to leave the home as a legacy to any heirs — then a reverse mortgage probably isn’t a good choice….
Written by Elizabeth Ecker