Is a Reverse Mortgage the Solution?

For many the transition to retirement means adjusting to a fixed income that is often lower than the income you received while employed. To make matters worse, the most valuable asset you have is usually your home, but it cannot be readily turned into cash. To help with this lack of financial liquidity, banks offer reverse mortgages as a way to tap into the equity of your home. Tenenz 1

How a reverse mortgage works

A reverse mortgage is a special bank loan to a qualified senior citizen (age 62 and over) that enables older homeowners to tap the equity they have in their home. Importantly, no repayment of the loan is required until the home is no longer the borrower’s primary residence. This means you can receive cash today based upon the equity of your home without making loan payments. The bank receives repayment for their loan out of the proceeds obtained when the home is sold at a later date.

Why does the bank do this?

First, the bank charges up-front fees to create the reverse mortgage.

Second, the bank still receives their interest, service fees and principal. They just need to be patient as the payments occur after the borrower leaves the home (usually when the house is sold).

Third, the bank has little risk. The bank is insured by a federal agency so their risk is controlled and they are guaranteed repayment.

What are the advantages?  

Tenenz 2You can use the equity of your home without the burden of house payments or selling your home.

 

Tenenz 2You retain title to your home.

 

Tenenz 2It is a HUD program, ensuring Federal compliance and consistency within the program.

 

Tenenz 2Eligibility has few restrictions. You must be over 62, occupy the property as a primary residence, and own the home free and clear (or have little remaining balance on the mortgage).

 

Tenenz 2Most single-family dwellings qualify (up to a four unit dwelling).

 

Tenenz 2The amount that can be borrowed is based upon a HUD formula that uses the age of the youngest homeowner, interest rate, and appraised value of the home. There are also upper borrowing limits.

 

Tenenz 2Cash advances from the program can be used for any purpose.

 

Tenenz 2The income is tax-free and will not impact Social Security, Medicare, or Medicaid benefits.

 

What are the Pitfalls?

Tenenz 3The closing costs for a reverse mortgage are high. While all but the application fee can usually be folded into the reverse mortgage, the cost should be weighed against the outright sale of the home.

Tenenz 3Passing your home to your beneficiaries becomes limited. Once you move or pass away the reverse mortgage becomes payable. Your inheritance would then be reduced by the amount owed.

Tenenz 3What is the plan? If you are planning to move in the near future it may be better to sell your home to tap the equity versus undertaking the expense of a reverse mortgage.

Tenenz 3Is it a legitimate reverse mortgage? Make sure the reverse mortgage program is a HUD program. If not, the program may contain some unforeseen risks.

While not for everyone, reverse mortgages are an option to use the equity of your home if you are retired and on a fixed income. If you are interested, most programs provide a free face-to-face counseling session from an independent counselor prior to a bank being allowed to offer the reverse mortgage.