Why Obtain an Equity Redemption

Five points to remember

A reverse mortgage is a loan against your home that requires no repayment as long as your home is your main residence. They are "non-recourse" loans -- the amount you owe can never exceed the net selling price of your home. If borrowers live beyond their life expectancy (by definition half of us will), a reverse mortgage can be a very favorable choice. If you die prematurely, your annual loan cost will be higher.

you will still own your home. A reverse mortgage is just a loan. If you sell your home, the loan is repaid and you or your heirs receive the leftover home equity.

If it turns out that the loan balance is greater than your home's net selling price, the government (or the lender such as Fannie Mae) makes up the difference. This is what "non-recourse" means.

loan advances to you are not taxable. They are disbursements of principal, not income.

the loan is not due on any specific date and there are no payments. You can live in your home as long as you wish without repaying the loan (you still own your home and must keep insurance and property taxes current.)

if you are uncomfortable with the words "Reverse Mortgage", consider calling it "Equity Redemption." It's your home -- you can redeem some of its equity now, without selling it.

Increase your cash reserves

reverse mortgages allow you to set up a line-of-credit (a "cash account") and draw funds whenever you wish

stop worrying/increase your peace of mind - with a cash account for "rainy day" expenses, emergencies, unexpected needs, larger than expected costs

improve your everyday life by increasing your immediate financial capacity; have more cash readily available to enhance daily living; untighten your monthly budget

increase your financial flexibility with a cash account so you can take advantage of future opportunities: buy at a bargain price, get married, do it now while you can

you can repay some or all of your cash account principal, then draw some or all of the money out again whenever you wish

With a HUD HECM reverse mortgage, the lending limit of the cash account (line-of-credit) grows each month at the loan's effective interest rate. This ensures that you can enjoy your cash account's full benefit whether you draw cash quickly or save it for a rainy day.

Imagine two borrowers, Mrs. Jones and Mrs. Smith with initial cash accounts that have the same limit. Mrs. Jones uses hers immediately by drawing all the available money. Mrs. Smith saves hers for future use. Five years later, Mrs. Smith can draw a larger amount -- actually matching the loan balance of Mrs. Jones line-of-credit account. Why does this make sense for the lender? Because whenever the cash accounts are eventually drawn to 100% of their limits, the two loans will have the same balance due.

	Mrs. Jones	Mrs. Smith
Initial Cash Account	$ 65,000	$ 65,000
Immediate Cash Withdrawal	- 65,000	0
Funds Available Now	$ 0	$ 65,000
Five Years Later
Cash Account Limit	$ 88,472	$ 88,472
Cash Account Principal	- 65,000	0
Cash Account Interest	- 23,472	0
Available Funds	$ 0	$ 88,472

Increase your monthly income

reverse mortgages allow you to set up regular monthly cash advances (commonly called a home tenure plan)

get rid of your monthly payments (mortgage, home equity loan, credit card debt)

get tax-free monthly income (loan advances to you are not taxable)

Since the new reverse mortgage will payoff your current debt, your spending money will rise by the amount of the payments you are making on that debt. The example below compares a hypothetical "Current Situation" with a tenure plan reverse mortgage. Since tenure payments are loan advances, there is no income tax to worry about.

	Your Current	With Reverse	Increase in
	Situation	Mortgage	Benefits
Current Monthly Income	$ 1,700	$ 1,700
Payments on Current Debt	- 500	0	+ 500
Tax-free Loan Advances to you		600	+ 600
Your Monthly Spending Money	$ 1,200	$ 2,300	+ 1,100

Take cash now

reverse mortgages allow you to withdraw cash immediately. You can take any portion or all of the funds available to you as "Upfront Cash"

feather your nest - renovate/improve/repair your home; refurnish your home.

enjoy life (travel, hobbies, buy a TV, computer, new car, RV)

take care of yourself and any health or medical needs

finance a divorce settlement. One spouse can retain the home and buy out the other's equity with the proceeds from a reverse mortgage.

Your kids and their kids

you've saved during your whole life; your home is your nest egg; a reverse mortgage allows you to use some of your home equity now without selling your home

be independent of your kids; don't worry about being a burden

help your kids directly now, when they may need it, rather than later (via your estate) when they may need it less or not need it

put your grandchildren through college; current tax law allows grandparents to directly fund a college education without incurring federal gift taxes

alternatively - die broke, disinherit your kids, redraft your will to read: "being of sound mind, I spent it all" -- after all, it's your home, not theirs

Versus a home equity loan

regular home equity loans require you to make monthly interest payments; with a reverse mortgage no monthly payments are due

you must qualify for a home equity loan; with a reverse mortgage there are no income requirements and much less credit history scrutiny

home equity loans have a due date when you must pay back the entire loan balance; reverse mortgages are not due until your home is no longer your principal residence

home equity loans may initially give you a higher percentage of your home's value, but that is because you make payments on them to keep the loan balance level; a reverse mortgage accrues its interest and the loan balance grows. Simply put, over time a reverse mortgage will most likely give you more spending money than a home equity loan.

home equity loans give the same percentage of your home's value whether your 62 or 82, but that is because they have a fixed due date; reverse mortgages generally give more to older borrowers since someone 82 will probably stay in their home fewer years than someone who is 62 - there is no fixed due date for you to worry about.