Reverse Mortgages: The Good, The Bad and The Ugly
According to Wikipedia, A reverse mortgage is a mortgage that is typically secured over a residential property, which allows the borrower to access the unencumbered value of the property. Reverse mortgage loans are typically promoted to older homeowners and usually do not require the typical monthly mortgage payments making them attractive to older homeowners who may need better cash flow at this time in their lives, especially if they haven’t adequately saved for retirement. Although the homeowners are still responsible for homeowners insurance and property taxes, reverse mortgages allow older homeowners to access the home equity they built up in their homes now rather than wait until they need to move or sell or die.
The Good:
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- Allows the homeowner to stay in the home as long as you keep the loan in good standing and as long as you live (or can) in the home.
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- You or your heirs will never owe more than the home is worth.
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- Can pay off existing mortgages on the home.
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- Easy to qualify for because generally no income requirements and no minimum credit score required.
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- No monthly mortgage payments are required.
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- The homeowner receives payments on flexible terms such as credit line, lump sum distribution, monthly payments or a combination.
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- The interest rate may be lower than traditional mortgages and home equity loans.
- Loan proceeds are not taxable.
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- If your heirs inherit the home, they may keep any remaining equity (after the balance of the reverse mortgage is paid off).
The Bad:
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- Fees on a reverse mortgage are higher than a conventional mortgage.
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- Loan balance gets larger over time since there are no payments required but the interest still accrues. This can often exceed the value of the home depending on factors such as housing market (think of the housing market crash in 2008)or how long the homeowner lives. This then also may decrease the value of the estate/inheritance over time.
- Need-based government assistance (Medicaid) can be affected if a surplus of funds is withdrawn in a month.
- The program is often misunderstood.
The Ugly:
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- Can eat away at valuable home equity.
- If you need to move out to an assisted living facility, nursing home or the like; the loan becomes prematurely due.
- Risk of foreclosure if you don’t keep the house in good repair or fall behind on any payments (taxes and insurance).
So before you or your parents dig in to the lure of a reverse mortgage, think carefully and consider consulting with a tax attorney or an accountant to determine what is best for your family.
Photo credits by: North Bay Capital.
