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4 Ways to Tap Your House for Cash

Even in a down market, you can safely unlock your equity

by: Mark Miller, from: AARP The Magazine, November 2011 issue

2. Leverage your home

Reverse mortgages, which are available only to homeowners age 62 or older, were designed to help cash-strapped seniors tap home equity while staying in their houses. As the name implies, these loans are the opposite of a traditional "forward" mortgage, in which you send the lender cash to pay down debt and increase equity. A reverse mortgage pays out the equity in your home to you as cash, with no payments due to the lender until the homeowner moves, sells the property, or dies. The amount you owe increases over time, while the amount of equity decreases. These mortgages are frequently criticized for their high fees, but a new, lower-cost "saver" version introduced last year offers a less costly option for many homeowners.

Called a Home Equity Conversion Mortgage (HECM) Saver, the new loan is administered by the U.S. Department of Housing and Urban Development just like a standard HECM, but the amount that can be borrowed is smaller and has far lower costs: an upfront premium of only 0.01 percent of the property's value or HUD's loan limit, whichever is less, versus the standard loan's 2 percent. "It's a tool for hedging against unexpected expenses," says Tom Dickson, national intermediary sales leader at MetLife Bank, the reverse mortgage industry's largest lender.

Home equity lines of credit secured against the value of your property can also provide standby funds in a pinch.

Financial planner Harold Evensky of Evensky & Katz Wealth Management sees the lower-cost HECM Saver as a partial replacement for his favorite retiree financial tool: a $100,000 cash reserve that can be called on for living expenses instead of drawing down investment portfolios in bear markets. But most people can't set aside that much cash. For them, using a HECM Saver as what Evensky calls a "standby reverse mortgage" might fit the bill. "We can reduce the client's emergency reserve to six months," he says. "If that runs out, you simply tap the reverse and pay it back when things get better."

It is important to note that there are closing costs associated with setting up a reverse mortgage, even if the line of credit is never tapped. Evensky's research team found that using a reverse mortgage as a standby resource helped an investment portfolio last 20 to 60 percent longer in retirement, depending on the scenario specifics.

Home equity lines of credit secured against the value of your property can also provide standby funds in a pinch. They are typically less useful for older homeowners, however, because retirees often have a hard time meeting lender qualification requirements unless they have significant sources of regular income, such as Social Security or pensions. And unlike a reverse loan, the HELOC funds require ongoing monthly payments from the borrower. Also, banks can freeze, reduce, or revoke a home equity line if your equity falls too low — and that's just what happened to many borrowers after the housing bubble burst and home values plummeted.

Next: Stay in your home, after you've sold it (legally). >>