You’ve probably seen those commercials on television with Henry Winkler, “The Fonz”, extolling the virtues of a reverse mortgage as an answer to your retirement financial uncertainties. Then there’s the one with ex-Presidential candidate/actor Fred Thompson telling you how a reverse mortgage can help you enjoy your retirement more by borrowing against the equity in your home. As great and appealing as those ads make reverse mortgages sound to someone who might have some financial retirement worries, you might sit there watching and wondering, what’s the catch? Well, here’s a little more information than those ads provide so you know exactly what might be the catch in activating a reverse mortgage.
Are You Intrigued by a Reverse Mortgage?
Let’s face it – the last 5 years have dealt a cruel blow to the American economy. You may have lost a job, lost money in your retirement account, IRA’s, stocks, etc. If you’re lucky enough to have not lost your home to foreclosure, you may be wondering how a reverse mortgage might work for you to provide some financial security in your retirement. To help you make up your mind, here’s the simple lowdown on how reverse mortgages work:
1. Borrowing power. A reverse mortgage allows you to borrow against the equity in your biggest financial asset – your home. If your home is paid off, there’s more money available to you to borrow. Yet, even if it’s not paid off you can still do a reverse mortgage. You can use the reverse mortgage to pay off the remaining amount of your conventional mortgage. The amount you’re able to borrow is decided by the current value of your home, current interest rates, your age, any other outstanding liens (like taxes, etc) on your property. You have to be 62 to do a reverse mortgage but the older you are enables you to borrow more. Currently, mortgage interest rates around the country are still fairly low.
2. You still own your home. A reverse mortgage allows you to maintain ownership of your home. You, or your surviving spouse, will never be “evicted” from your home. The reverse mortgage only becomes a lien against your property and doesn’t “mature” until, or if, the last surviving homeowner either permanently moves from the property or passes away. At that time, your estate has 6 months to sell the property to repay the loan. Your estate is not liable if the home sells for a lower price than the balance of the loan. A reverse mortgage is what’s called a “nonrecourse loan” which means that the reverse mortgage loan can never exceed the appraised value of the property at loan maturity.
3. Increases your income without payments. In a reverse mortgage, the lender – (bank, credit union, etc that creates your reverse mortgage) makes payments to you, rather than you making a mortgage payment. You’re paid in either a lump sum, a line of credit, or monthly payments to you in an amount determined by the lender according to the criteria mentioned above. This money can allow you to supplement retirement income or enjoy your retirement more.
1. Reverse mortgage loan costs. These can be significant from several different fees – loan origination fee, interest rate, mortgage insurance fee, appraisal fee, title insurance fees, various closing cost fees – and can add up to near $40,000. These fee costs are rolled into the reverse mortgage loan and not paid out of pocket. So, if you’re borrowing $200,000 against the current equity in your home, if you move out of your home or sell it, you own the basic loan plus all the fees that have been added in.
2. Needing to leave your home. If your health necessitates you moving into an assisted healthcare facility for more than 1 year, the reverse mortgage loan would then mature and you would have to pay it back to the lender. You would have assisted living costs as well as the reverse mortgage cost.
3. Shrinking equity, estate assets. A reverse mortgage generally decreases the equity in your home. This will leave less money in your estate for your heirs.
To summarize, a reverse mortgage can be a good retirement finance management tool to consider in today’s uncertain times. It can give you an additional stream of income and added peace of mind in retirement. It may even allow you to retire when you previously thought you couldn’t. Yet, before activating a reverse mortgage, weigh all the pros and cons of your particular situation and be sure to consider all the possible outcomes first.
In addition, you should never pay for information regarding a reverse mortgage and you should avoid lenders claiming to be affiliated with free government programs or claiming non-profit status. Avoid high-pressure lenders that seem to want to “close the deal” quickly if you’re not comfortable with their offer. Talking to a legitimate financial retirement planner can help you better decide if a reverse mortgage may be right for you.
Reverse Mortgage for Dummies, http://www.dummies.com/how-to/content/the-pros-and-cons-of-a-reverse-mortgage.html
Reverse Mortgage Advisor http://reverse-mortgage-advisor.com/?aid2=5240&utm_campaign=5240&oid2=453