Tuesday, June 24, 2008

Reverse mortgages - tapping into equity for liquidity

This posting is a followup to last week's post about reverse mortgages.

For most seniors, their home is their greatest financial resource. It represents years of hard work and prudent savings. Wouldn't it be great if the value that has built up in the home could be applied to other needs or for well-deserved rewards for a lifetime of hard work?

It used to be that the only way to access that equity was to sell the home. For many, selling the home is not a desirable choice. However, in recent years we have seen the growth of a very viable alternative for those seeking access to the savings accumulated in their homes. A reverse mortgage provides the opportunity to convert the equity in the home into immediately available funds.

As the name infers, this mortgage works in a manner opposite to that of those we are used to. That is, instead of the borrower paying the lender, the lender pays the borrower. As in traditional mortgages, the home is still collateral for the loan.

To qualify for a reverse mortgage, you merely need to be 62 years old and own your home. Credit considerations are very relaxed. The greatest restriction lies only in the percent of the property’s total equity that can be accessed.

Great flexibility exists as to how the proceeds of a reverse mortgage can be paid out. A senior may wish to be paid in one lump sum; or in monthly installments (like an annuity). The loan amount may also be treated as a line of credit which can be accessed only when desired and in varying amounts.

The key is that the reverse mortgage does not have to be repaid until the property is sold or the borrower no longer lives there. The magazine of the AARP offers an easy to follow analysis of reverse mortgages and even provides an interactive calculator to assist interested borrowers in their consideration of whether a reverse mortgage is right for them.

Monday, June 16, 2008

Reverse Mortgages: Turning Equity Into Liquidity

As of July 1, 2006 the U.S. census bureau reports that the resident population of persons age 65 and over was 37.2 million. By 2015, that number is expected to rise to 46.8 million; and by 2020 to 54.6 million.

Residents of Illinois over age 65 on July 1, 2006 numbered 1.5 million (or about 12% of the state’s total population). By 2015, their numbers will grow to 1.78 million (or 13.6% of total population).

Nationwide, almost 81% of persons 65 and older own their home. As of the fall of 2005 that number was 17,818,000. Of those, over 12 million own their homes free and clear. That is, they enjoy 100% equity in their real estate. When you consider that between 2005 and 2006 The National Association Of Realtors placed the median sales price for existing homes at around $220,000, this group of Americans have amassed collective unencumbered wealth of 2.64 trillion dollars.

For most, their home is the single largest plank in their investment platform. They have worked hard, saved, paid off their debt and now sit (literally and figuratively) on an unquestionably secure and valuable asset. The trouble with it is it is not liquid. You can’t chip out a few bricks or take part of the porch to buy a new car, take a vacation, or make a gift to the grand kids.

But what if you could take that otherwise illiquid asset, convert it to cash, and still live in it? Too good to be true, you think. Not so. A reverse mortgage allows these frugal seniors to do just that. It allows them to enjoy the fruits of their hard work and judicious saving without having to deal with selling the property and uprooting themselves from their home of so many years.