I am curious about reverse mortgages and am wondering if this is a good option for me. If so, how do I find a reputable mortgage rep to work with? --Jeanne, Boothwyn, PA
This is a question that more and more people have been asking since 2008 when many retirement nest eggs shrunk significantly. On the surface -- and certainly in those TV commercials featuring aging actors -- reverse mortgages sound great: tax-free, easy access to cash that is safe and effective. That description is mostly true, but there are a few caveats.
Here are the basics: a reverse mortgage is a special kind of loan that allows you to turn your home equity into cash in a variety of ways. You can choose to receive monthly payments, or an equity line to pay-outs as needed, or a combination. The amount you can borrow varies and is based on your lender, your age, the value of the home, current interest rates and loan fees.
You can use the money from a reverse mortgage for anything, from paying bills to making home improvements. Unlike a traditional home equity loan, a reverse mortgage doesn't need to be paid back immediately or even during your lifetime. So, no monthly payments required! Additionally, reverse mortgage loans are not taxable (however loan interest is not tax-deductible) and do not affect your Social Security or Medicare benefits.
To be eligible for a reverse mortgage, you have to be at least 62 years old and own your home outright -- or be able to pay off your home with proceeds from the loan -- and you must also live in the home. Most residences qualify and there is no income or medical requirement; however, you must be current on your property taxes and homeowner’s insurance and may need to show evidence to a lender that you can continue to stay current on those payments.
Here’s the catch: the costs associated with reverse mortgages are usually steep and include having to pay for mortgage insurance regardless of how much equity you have and accruing interest owed over time, typically at a variable rate. Upfront costs tend to be high and are paid out of your home equity at closing. In addition, there are other fees tacked on the backend.
The costs may not be a concern at first since most of them are paid after death or selling the home, but keep in mind that they could significantly reduce what is left for your heirs. Additionally, it is important to consider that a reverse mortgage could affect Medicaid eligibility since they count loan proceeds as an asset; and if you ultimately needed to leave your home for medical reasons or became delinquent on property tax and homeowner’s insurance bills, the lender could require selling your home ASAP.
Another danger with reverse mortgages, as with most other senior-focused products and services, is the potential for scams and unethical sales practices. An example of this is when a lending representative sells a reverse mortgage and then recommends using the proceeds from the loan to purchase a potentially expensive and restrictive financial product, like an annuity.
Some experts who specialize in advising seniors recommend a reverse mortgage as a “last resort,” because of the costs and risks compared to other options, like refinancing, home equity loans or single-purpose loans they may not know about. Many cities around the country have local organizations that offer free or low-cost programs to help seniors in need. To find out what resources might be available in your area, visit www.ncoa.org or www.eldercare.gov.
Despite the potential negatives, some seniors may feel that the benefits of a reverse mortgage -- particularly not having to write monthly payment checks -- are worthwhile. In any case, if you are a senior in need of financial help, you should consult a qualified advisor, do extensive research and explore several different lenders before making any decisions that could affect your well-being and your family’s well-being. The U.S. Department of Housing and Urban Development, the Federal Trade Commission, and AARP all offer great information on reverse mortgages and related links. Safe shopping, Jeanne!
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