Reverse mortgage has advantages, drawbacks
- Posted by admin on August 11th, 2009 filed in Reverse Mortgage Info
- 1 Comment »
Reverse mortgages have become a popular option for seniors who would like to reap some of the benefits of the equity they have built up in their homes. However, it’s important to be aware of both the advantages and drawbacks to these loans.
A reverse mortgage is simply a different kind of home loan, one that is generally only available to people 62 and over. Instead of borrowing to buy a house, the homeowner gets a loan based on his or her equity in a home he or she already owns. Say, for example, that you own a home worth $200,000 with no outstanding mortgage on it. You are nearing retirement and would like to add some extra income to your retirement savings. The bank offers you a reverse mortgage of $75,000. You can choose to receive the money in payments spread out over time — for example, monthly — or in a lump sum payment. You can also set up the loan as a line of credit that you can tap into as needed. You do not have to make any repayments until the home is sold or until you die or move, even if you outlive the loan term. And you do not have to move out of the home when the loan term ends, either. When the home is sold or you move out of it, you or your heirs must repay the $75,000 — with interest and fees — out of the sale proceeds.
In addition to being 62 or older, to qualify for a reverse mortgage you must own the home outright and live in it as your principle residence. If you have an existing mortgage on the home, it should be a relatively small one that you will pay off with some of the reverse mortgage proceeds. Your income is not a factor in the loan decision, since you will be receiving payments, not making them.
A reverse mortgage can be a great way to free up equity in your home to use during retirement. However, they are not always advisable. They’re probably a better deal if you are in your seventies or older rather than in your sixties, in part because the bank will likely be willing to give you a bigger loan because decisions are made based on your life expectancy. In addition, if you expect to downsize, move closer to family or transition to an assisted-living or similar facility sometime in the future, remember that you will have to pay the loan amount back to the bank when you sell your home. That means you will have less money to spend on your next residence.
One of the biggest drawbacks of a reverse mortgage is its impact on the inheritance you leave. In our example above, after the $75,000 loan amount — plus interest and fees — is deducted from the value of a $200,000 home, there will be less money left for your heirs, a key issue to consider before taking this type of loan.
It’s also important to ask questions about the responsibilities facing you down the road. Find out about the interest rate and fees on the loan, and how much they will amount to when the mortgage is paid off. Especially with home values dropping during the last year, you don’t want to learn that the total amount you owe later is more than the value of your home.
Reverse mortgages are generally made available under the U.S. Department of Housing and Urban Development’s Home Equity Conversion Mortgage Program. You can learn more by calling 800-569-4287 or going to the HUD Web site at www.hud.gov.
And be sure to contact your local CPA with any questions on important financial issues. He or she has the expertise to provide the advice you need.
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August 19th, 2009 at 5:44 pm
Okay, here you go again…perpetuating another dangerously conveyed message.
Why do you assume that the basis of traditional financial planning “thinking” is the correct ideology…especially relating to utilizing or not utilizing an asset that will never produce a rate of return (i.e. equity)? It seems this has become a path repeated by shepards and where all the sheep get herded. In fact, this prevailing mindset is more like a “koolaid” that has led to the loss of billions 9maybe trillions) in retirement savings of soooooo many seniors [and non-seniors]? How can any honest professional subscribe to a planning montra that has failed time after time to produce projected results…for MOST people. Even a weathermen [woman] have a better track record of accuracy.
Most seniors who own their primary residence free and clear would typically like to ensure that their loved ones benefit from their lifetime of hard work, right? So why aren’t they taught or educated of “opportunity cost” or the value of a dolar today versus 5, 10, 15 years from now?
How about you agree to sell me your home for $200,000 but I don’t have to pay you anything until 15 years from now? At that point I will pay you the full $200, 000. Sound like a good deal? Crazy right? So, why would you NOT suggest that seniors consider gifting TODAY in situations where they intend to gift to specific loved one. Imagine how much more the kids or grandkids might be able to grow that asset…over the next 5, 10, 15 years. Or, grandma and grandpa might consider purchasing a second (vacation) home to use for pleasure (them and kids), growth and income in the off season? When you factor in the “velocity” of money by tapping equity without a monthly repayment, you leverage wealth while potentially enjoying a more comfortable lifestyle. Sure, there are pitfalls, but there is no single financial product that fits everyones needs or wants.
The fact is that home vales have fallen by nearly $6 trillion dollars since 2008, yet the higher cost of the reverse mortgage (in comparison to forward mortgages) can still be justified (mathmatically) and may be more so…if values continue to slide south. Then, the reverse mortgage program may serve to rescue more seniors from foreclosure. That could be a far better course, and less costly, than the consequence to our economy without the program.
I’ll stop reading and responding to your articles…but I hope that you will consider these comments as simply food for thought. I’m sure you had only good intentions.