Several months ago we posted an article regarding What Can A Home Equity Loan Do for You? We wanted to delve into the Reverse Mortgage a bit more.
What is a Reverse Mortgage?
A reverse mortgage is a popular but complex home loan for senior homeowners. If you qualify for a reverse mortgage, you will not have to make monthly payments on the loan. Instead, the lender pays you, similar to an annuity. Typically, the reverse mortgage is repaid from your home’s equity when you sell the home, move out permanently, or die. You, or those who will inherit from you, can keep any sales proceeds from your home in excess of what you owe the lender. However, with the current housing market depressed and likely to be this way for a while to come, there are few instances where this is the case.
To qualify for a reverse mortgage, you must be a homeowner who is at least 62 years old. The mortgage on your home must either be paid off entirely or have a low remaining balance. Generally, the amount you can borrow depends on the value of your home, the amount of equity you have in the home, and your age at the time of loan application.
How Do I Know If a Reverse Mortgage Is Right For Me?
A reverse mortgage may only be appropriate for a narrow percentage of senior homeowners (but when it’s the right tool, it’s really the right tool). Similar to an annuity, it can undermine seniors’ financial futures by making them ineligible for Medicaid (Medi-Cal in California) benefits they might otherwise qualify for without the reverse mortgage. See my blog entry on August 16 discussing whether an annuity is the answer. So if you have an intention of making sure the family home gets passed down for generations, or is kept as an income producing property, then a reverse mortgage is probably not right for you.
It may be a useful financial tool if the following conditions apply: you have a consistent need for additional living funds with minimal savings; you live on a fixed income, your only asset is your home equity and you do not plan to leave your home to your children or others who will inherit from you.
Don’t take a reverse mortgage if you want to leave your home, free and clear, to your children or heirs. There may be other, less costly means to reach your financial goal. A reverse mortgage can be an expensive way to borrow money. Speak with an elder law attorney to get an idea of the possible financial impact a reverse mortgage can have on your ability to qualify for certain Medi-Cal, Supplemental Social Security Income (SSI) and VA benefits.
Some of the advantages of a reverse mortgage include helping you maintain your financial independence and an adequate standard of living. The money you receive from a reverse mortgage is tax-free. Additional disadvantages include it having greater costs to obtain the loan than many other types of loans and the fact that reverse mortgage options can be confusing and numerous. The home is the biggest asset for the majority of families, thus it is critical to understand the consequences of various financial tools involving your home. You should get counseling from an elder law and estate planning attorney prior to making any big financial decisions with your home. For more information regarding reverse mortgages visit CANHR’s article discussing reverse mortgages.