For reasons that aren’t particularly important, the subject of reverse mortgages have been recently discussed among my friends. When I wrote, Your Room at the End: Thoughts About Aging We’d Rather Avoid, I touched briefly on the topic. At that time, reverse mortgages were fairly new and there were some issues that seem to have since been smoothed out. As with any major financial decision, consulting an expert is strongly advised. In general, a reverse mortgage is good for certain categories of individuals and not suitable for others. In a nutshell, a reverse mortgage is sort of what it sounds like. A financial institution “mortgages” your home for a percentage of the appraised value (usually a pretty high percentage). You can take the money of that value in multiple ways which I’ll get to in a moment. You do not repay the mortgage until you move from the home. In the event all individuals who signed the reverse mortgage pass away, the estate is to repay the mortgage. That would ordinarily mean the house is sold by the estate and like any other sale, if the value is greater than the amount owed, the estate keeps the balance. If the market is weak and the property cannot be sold for the amount owed, the financial institution cannot go after any source of payment except the estate. In other words, if you have heirs who don’t want to pay off the mortgage to own the house, they do not assume that debt.
Okay, getting money from the reverse mortgage usually comes with four options; a lump sum for the entire allowed amount; a monthly payment spread out over an agreed-upon time; a line of credit, or a combination of options. It’s important to remember this money is not taxable. Which option suits you will depend on your circumstances. The point to a reverse mortgage though is to allow you to remain in your home and the requirement is you must keep the home maintained, carry insurance and pay your property taxes. So, when deciding how to take the money, you have to make sure you can fund those items.
There are usually three areas that trip people up. There will be some costs to taking out the reverse mortgage just as with any other type of mortgage and this amount is usually subtracting from the final amount allowed. Your home may not be worth what you think it is, and therefore, the final amount may be less than you anticipated. As you age, in all likelihood, you will require more assistance in maintaining the house, and that usually incurs costs. Depending on your age, you could easily remain in your home for 20-30 years. Another important point is the bank cannot “call” the mortgage as long as you maintain the house, insurance and pay your property taxes.So, let us say whatever amount of money you received is spent and you are still in your house. That’s okay as far as not repaying the mortgage goes. If, on the other hand, you have not set aside adequate money for the minimum upkeep, insurances and taxes, the bank can foreclose. When people take the lump sum or even have a multi-year payout, they don’t always apply the money in such a way to ensure they can cover these costs.
All of this is a general overview and everyone’s situation has unique aspects, but if you have no one to leave your house to, a reverse mortgage could be a useful financial tool. The specifics and rules do change, but it might be something worth exploring.