Nobody hesitates to take out a mortgage to buy their home. So why all the controversy around reverse mortgages?
Honestly, I don’t know.
A reverse mortgage is simply a tool that may allow you to stay in your home, rent free, while using some of your money that bought that home in the first place. That being said, like any major financial decision, you want to do your homework before you determine if it is the right tool for you.
Below you'll find two things to like, one thing to hate, and five things you need to know about reverse mortgages.
Like:
Flexibility
A reverse mortgage gives you the ability to use home equity for “extras” such as an annual vacation, new car or home improvements. This flexibility comes from the ability to take out equity as a lump sum, fixed monthly payments, a line of credit, or any combination thereof.
Online calculators will give you an estimate of how much you can get when you input your zip code, age, home value and existing mortgage balance (if you have one).
Non Recourse Financing
This simply means the total amount owed can never exceed the current value of the home. When the home is sold, after paying off the reverse mortgage, remaining proceeds go to you and your estate.
Hate:
Sleazy Sales Tactics
If someone is trying to talk you into taking money out of your home to buy a financial product that will pay them a commission (such as an annuity), run for the hills.
Most people recommending such strategies are not financial planners. They are salespeople; one trick ponies, whose trick benefits them, not you.
There are times where it may make sense to use home equity to pursue other investments, but these strategies contain additional risk, and should only be used by sophisticated investors who fully understand the consequences.
Be Aware Of:
Moving After Taking a Reverse Mortgage
Like any mortgage, there are origination fees and expenses incurred when taking a reverse mortgage. You want to amortize these expenses over the longest period possible.
If you plan on moving in the next 2-4 years, look for less expensive ways to borrow money before you decide on a reverse mortgage.
Keeping the Home in the Family
Upon your and your spouse’s death the reverse mortgage will have to be repaid. If there is not enough cash in your estate then your heirs may have to sell the property to pay off the loan.
If your intention is to keep the property in the family, you’ll want to make sure heirs will have the ability to pay off the loan, or refinance the property based on their credit application.
State of the Real Estate Market
The amount of money you receive depends on your age and the appraised value of your home. Taking a reverse mortgage when the real estate market is in a slump means you’ll qualify for less.
On the other hand, if you take a reverse mortgage when the market is booming, then later decide to sell your home in a down market, you may have little equity left.
Ownership Responsibilities
You always retain title (ownership) of the home. Thus you are responsible for taxes and insurance and must keep the home well maintained.
Eligibility for Medicaid
Any proceeds you receive will count as an asset and may affect your eligibility for Medicaid. Proceeds will not affect Social Security or Medicare benefits.
Additional Articles
Benefits of a Reverse MortgageWhat is a Reverse Mortgage?
