Is a Reverse Mortgage a Good Idea?
By Chuck Yanikoski
A reverse mortgage is an arrangement whereby you receive a monthly (or other) payment, while the provider of the mortgage gets first rights to the value of your house when you die or otherwise leave it. Such an arrangement might make sense for you if all the fol-lowing are true:
- You are age 62 or older (if you are married and own the home jointly, both of you must be at least 62).
- You have substantial equity in your home.
- You are short of cash, and have no other assets you can and want to dispose of in order to raise money.
- You expect to stay in your home for at least a few years, preferably more.
- You do not have anyone who is counting on inheriting your home.
- Your house will not need extensive repairs to qualify for a mortgage.
- You do not have any better option available for extracting the equity from your home (such as a home equity loan, or selling and moving to a smaller place).
- You do not have an existing mortgage that features especially favorable terms.
Reverse mortgages are available in many flavors, but here is how they work in general:
- You apply, as you would for a regular mortgage, with a lender. The terms of the mortgage will depend on your age, the amount of equity you own in your home, and the level of current interest rates.
- If you obtain a government-backed Home Equity Conversion Mortgage (which is the normal way), you will have to go through a counseling process first, to make sure you understand the arrangement and to help assure that it is really right for you.
- There will be closing costs, as there are with any mortgage. You should expect the fees to total 2% or less of the total loan amount, and these generally can just be added onto the amount of the loan. Some lenders will waive most closing costs, but expect their interest rates to be higher.
- You may receive a lump sum, monthly payments, or a line of credit that you can write checks against - or a combination of these, depending on your needs.
- You still own the home. This means that you, not the lender, will be responsible for upkeep and taxes. If your home is in need of repair at the time you take out the reverse mortgage, the lender may require that the problems be taken care of. The cost of such improvements would generally be included as part of the loan, so you don't pay out of pocket.
- The money you receive is a loan, and therefore it is not taxable. It does not affect eligibility for, or taxation of, Social Security or Medicare benefits. However, it may affect eligibility for Medicaid or SSI benefits.
- You do not make any loan repayments while you still live in the house.
- Your ability to continue receiving money under a reverse mortgage depends on your loan limit and the amount you have already borrowed. It also depends on the interest that accrues on your borrowings (and therefore on the interest rate being charged, which in most cases will go up and down over time). The total borrowed, plus interest, may not exceed your equity in your home. Therefore, even though you do not have to repay the loan for as long as you live there, it is possible that your access to continued new payments from the bank could end.
- When you (and your spouse, if you have one) no longer live in the house as your main residence - whether because of death, or for any other reason - the loan be-comes due. Typically, the house would be sold at that point, and the lender would be repaid from the proceeds. Any leftover proceeds would go to you or your heirs. However, if the heirs want to keep the house in the family, they may repay the loan in cash and the lender's claim on the house is released.
Before making your final decision, take these points into consideration:
- A reverse mortgage is likely to reduce what you can leave to others. However, if you have children, it often happens that they care less about inheriting your house than they do about your maintaining your independence. Talk it over with them, to find out what their concerns and preferences might be.
- You may be forced to sell your home before you die, if you need long-term nurs-ing care outside the home. Once you (or both of you, if you are married and co-own the home) have been out of the house for a year, typically, the contract will provide for the loan coming due at that time. Perhaps this would no longer matter to you, but perhaps it would.
- If the house has to be sold, capital gains taxes may be due. If you have borrowed near the full value of the house, so that virtually the entire proceeds are used to pay off the reverse mortgage, you will need other resources to pay any taxes that are due. This is a particular problem if, as noted just above, you are forced to sell the house during your lifetime.
- If you need money now for long-term care at home, a reverse mortgage can often provide such funds. But if you anticipate that you may need to move into residential care sometime in the next few years, the closing costs of the reverse mortgage might prove to have been a very high price to pay for a temporary solution. In this situation, look for a lender offering minimal closing costs, or find other means of raising cash, if possible. In particular, you may want to look into whether or not you qualify for public or private assistance of some kind.
- Brokers for reverse mortgages can make good money - off of you! Beware of anyone who approaches you first. They may be in it for themselves, not you.