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Reverse Mortgages
When I say “reverse mortgages” to people in my office I office get very emotional reactions. They sit across the desk from me, cross their arms and proclaim, “There is no way I would ever do that. It is a scam and I could lose my house!”
Now, to be clear, I am not a reverse mortgage expert. But I have had this article reviewed by a local reverse mortgage broker to ensure the accuracy of the contents.
I will start with the “pro’s” and end with the “con’s.”
In its purest form, what is a reverse mortgage?
Answer: You take out a loan against the equity of your home which you are not required to pay back until you sell your home.
This could make sense if you consider the other options:
You have to make payments on a home equity line of credit.
You have to make payments on a second mortgage.
If you refinance your home you would have to make payments.
Who likes making payments anyway?
I’m going to rattle off some common objections people have to reverse mortgages.
“The bank is going to steal my house away and I’ll have to move in with my kids.”
This really isn’t true. If you get a reverse mortgage, the only stipulations are:
- You pay your property taxes.
- You pay your homeowner’s insurance.
- You pay your HOA fees.
- You keep your house in decent shape.
As long as you do all that, you have nothing to worry about. The bank cannot come in and steal your house away.
“I have to pay high-interest rates on the loan.”
While reverse mortgages have slightly higher rates, they are still competitive. Right now rates are in the mid 2% range for ARM’s and in the mid 4% range for the fixed rate reverse mortgage product.
Let’s say your house is worth $100,000. You get a reverse mortgage and the bank gives you $40,000 at a 5% interest rate. Like I mentioned before, you do not need to make payments on the $40,000 loan. (payments are defined as principal and interest)
You live in the house another 20 years, at which point the loan (which has been compounding at 5%) is now around $200,000. Oh no! What happens now!
Nothing. You can continue to live in the house and when you sell it (or your kids sell it after your passing), you have to pay back the loan.
“But what if the outstanding loan is more than the value of my house?! What if my house is worth $150,000 and I owe $200,000 to the bank!” I’ll be underwater and owe the bank money.
No, you wouldn’t. FHA insurance (government insurance) covers any money between the home’s value and the value of the loan.
That’s right! If you sell the home for $150,000 and you own $200,000 on the reverse mortgage, the bank (and government) covers the $50,000. You never have to pay it back. This is a HUGE benefit.
“What happens if my house is worth $200,000 and I owe $100,000 to the bank for the reverse mortgage, and then I sell the house?”
You get the $100,000 of equity. All you need to do is pay off the reverse mortgage loan with the bank, and keep the rest, after normal closing costs.
“Is the money I get from the reverse mortgage taxed?” No.
“Can the bank cancel the loan and ask for all the money back?” No.
“What kind of homes qualify?”
Basically anything but a condo. Single-family homes, townhouses and villas are fine.
“Can I get a reverse mortgage if I still have a mortgage on my home?”
Yes, depending on how much equity you have. Let’s say you own a $100,000 home and owe $30,000. A reverse mortgage could pay off the loan so you don’t need to make any more payments.
“How much will the bank give me? How do they determine the payout?”
It mostly depends on your age. One spouse must be at least 62 years old.
“What choices do I have for a payout?”
You can get monthly payments.
You can use it as a line of credit and take money from it when you need to.
You can get a lump sum.
Or a combination of these if you have enough equity.
The “Con’s”
1. There is a good chance your kids won’t get the home.
2. If your health declines and you need to go to a nursing home for twelve consecutive months or more, you must pay back the loan because your house no longer qualifies as a “primary residence.” If you can’t pay back the loan it could go into foreclosure. You can always pay back the loan by selling the house, foreclosure is not the only option here.
3. There are quite a few upfront costs. Much like closing on a new mortgage.
“Dave, do you recommend reverse mortgages?”
It is not my place to recommend this strategy, and I do not utilize it in the financial planning I do for my clients. But I do believe it works in some situations. It truly depends on your comfort level and living situation. If you are interested in exploring this option let me know so I can point you in the right direction.
Be Blessed,
Dave
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