You have probably seen television commercials touting “reverse mortgages” as the greatest new thing for seniors. But what exactly are reverse mortgages? How do they work? What are their pros and cons?
Those are today’s questions for the 2-Minute Lawyer.
What Is a Reverse Mortgage?
Reverse mortgages allow people who are at least 62, own their home and have equity in it to borrow against that equity. (Home equity, as you know, is the difference between the value of the property and the amount owed on it.)
The amount you will be eligible for is based on several things, mainly the value of your home, your age, and interest rates. You will be eligible for a larger loan the older you are, the more your home is worth, and the lower current interest rates are.
Instead of making payments, as is done with a traditional mortgage, the borrower receives payments from the lender which can be taken in the form of a lump sum, fixed periodic payments (such as monthly) or a line of credit that the borrower can access when he wants.
As payments are received, the owner’s debt to the lender increases and her equity in her home decreases (unless, of course, the property’s value appreciates by at least as much).
Then, when the homeowner dies or sells the house, the loan is repaid. Any remaining equity is paid to the homeowner or his heirs.
Pros of Reverse Mortgages
- Reverse Mortgages Are A Source Of Income – They can provide the additional income you need for a more comfortable retirement.
- Tax Benefits – Because the income from a reverse mortgage is actually a loan, the proceeds are generally tax free. However, you would want to consult your tax adviser for more specifics related to the tax implications of doing a reverse mortgage.
- You Will Never Owe More Than The Home’s Value – According to FTC guidelines, you will never owe the lender more than your home is worth. Even if your home’s value drops, you will still receive payments.
- Equity Balance Is Yours – You or your beneficiaries will receive the balance if the home if sold for more than the loan amount.
- You Retain Title – The title to the home remains in the name of the homeowner.
Cons of Reverse Mortgages
- Fees – These mortgages are expensive. Reverse mortgage fees typically include a loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and various other closing costs, and are extremely high when compared with a traditional mortgage. The cost is not paid out of pocket, but rolled into the loan, which means that interest is then charged on it.
- Potential Medicaid Impact – It is possible that your eligibility for Medicaid, or other needs-based programs, could be affected by a reverse mortgage.
- Interest Rate – Many reverse mortgage options offer variable rates. Since interest rates are currently near historic lows, it makes much more sense to lock in a low fixed rate.
- Taxes And Home Owner’s Insurance Must Be Paid – With a reverse mortgage, the home owner is still responsible for paying homeowner’s insurance and taxes. Failure to make these payments could cause the loan to be called due prematurely and you to lose your house.
- Home Equity Used – Your home equity will be consumed by taking the reverse mortgage. You will have fewer assets to leave to your family as a result.
What’s the bottom line? Well, depending on your circumstances, a reverse mortgage could be a good option for you or a loved one; however, they are expensive and complicated loans. You should definitely consult with a lawyer before deciding whether to take out a reverse mortgage.
**These questions and answers are designed to provide helpful information that can be read quickly. They are neither a full explanation of the subject nor legal advice. To learn more, and to receive legal advice on which you can rely, contact me or another lawyer.