I was watching television the other night and more than a few commercials were touting reverse mortgages. In fact, I have noticed over the last year or so that these commercials are more frequent than normal. I have been asked by multiple clients about reverse mortgages recently – when I asked what prompted them to ask me about this topic, not surprisingly, they said they saw it on a television commercial. I explained to them, like I do with many financial strategies, that it may be a good idea for some, but not all.
What is a reverse mortgage?
A reverse mortgage is a loan from the bank that is secured by the equity in your home. You are basically borrowing against the equity in your home by using a mortgage. But instead of paying the bank back (like a traditional mortgage), the bank pays you either a lump sum payment or a fixed payment for a certain number of years. It’s called a reverse mortgage because unlike a traditional mortgage where the balance of the loan is reduced with each payment, the principal on a reverse mortgage increases over time. Generally, you don’t have to pay back the loan as long as you live in your home. The loan is usually paid when the last survivor of the reverse mortgage sells the house or the last person passes away.
When does a reverse mortgage make sense?
Older people who own their home can sometimes find themselves with a lot of equity but not a lot of cash in order to live the life they want. Also, a person could need money to pay for at-home medical care or to supplement their retirement income to cover basic living needs. A reverse mortgage can sometimes make sense as opposed to selling the home in order to raise cash. It usually works best for homeowners who want to stay in their homes until they die or if they are unable to sell their home prior to or during retirement.
What are the downside risks to a reverse mortgage?
As with other creative ways to tap the equity in your home, reverse mortgages have their drawbacks. The closing costs are usually more expensive than a traditional mortgage and become even more expensive if the homeowner remains in the home for only a few years. Additionally, under certain circumstances, the proceeds from a reverse mortgage could affect the homeowner’s eligibility for some public assistance programs such as Supplemental Security Income (SSI) or Medicaid. The reduction in home equity could also reduce the homeowner’s estate upon death and could be a disadvantage if you plan on leaving an inheritance to your family.
What are the general criteria to be eligible for a reverse mortgage?
All borrowers listed on the title to the home must be 62 years old and the primary lien on the home has to be the reverse mortgage with any existing mortgages or equity loans being paid off with the proceeds from the reverse mortgage. In addition, the home being used as collateral for the reverse mortgage must be the primary residence of the borrowers. The property taxes, insurance and any other expenses must remain current by the borrowers and all the maintenance and repairs of the home is the responsibility of the borrowers.
So what should I do?
It is important to know before you decide on a reverse mortgage that there are three basic types: a single purpose, federally insured and proprietary reverse mortgage. These will be discussed in more detail at another time but comparing the three types can be difficult and may carry different requirements. For example, a federally insured reverse mortgage requires counseling by approved agencies. Many times these counselors can help you with cost projections and offer to help you decide what reverse mortgage is right for you.
Before you decide to get a reverse mortgage, please do your research and speak with a financial advisor or other qualified professional familiar with reverse mortgages to make sure it is right for you and your specific circumstances.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Rick’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.