Don’t Dismiss Reverse Mortgages Outright

“No way.”  That is the #1 response I hear around the topic of reverse mortgages.

reverse_mortgageBut we are coming to the end of tax time — when the idea of having access to a little extra cash would come in real handy!  At some point in our lives sooner or more likely later — due to needing to pay for healthcare, caring for an aging parent, investing in a business or simply wanting a more secure “cushion” or “rainy day fund” — we will seek out ways to get our hands on more cash.

This topic becomes even more real to those considering the idea of retirement and then realizing that social security will pay for only a fraction of what we need for our lifestyles…Oh, and pensions are a thing of the past. Even if you have saved a healthy amount for a secure retirement, there is the complete unknown of where healthcare costs — namely long-term care — will be in 10, 20+ years from now.

How in the heck can a person come up with $100,000+ per year (in today’s dollars) to care for themselves or a family member in their later years when they can no longer do it alone?

This is where the idea of a reverse mortgage can be intelligently brought into the discussion.  There are a laundry list of caveats:

  • A reverse mortgage is part of a financial plan, not a last resort
  • At least one of the homeowners on the deed must be 62 years of age
  • There must be a minimum amount of equity in the home (that is paid off upon initiating the reverse mortgage)
  • There are limits to the amount, usually $625,000, that can be borrowed even on a home worth several million dollars
  • Basic home maintenance, property taxes and homeowners’ insurance must be kept up or paid to keep the reverse mortgage in effect.

There are a number of positive facts:

  • Borrowers who take out reverse mortgages STILL OWN THEIR HOME
  • A younger, non-borrowing spouse cannot be kicked out after the death of the older borrowing spouse (as long as he/she continues the obligations of the reverse mortgage, namely paying property taxes and homeowners’ insurance).
  • The proceeds of the reverse mortgage can be used for nearly anything including paying off the primary mortgage
  • The reverse mortgage loan does not need to be repaid until the last surviving borrower dies, sells the home or permanently moves out
  • The repayment amount cannot exceed the value of the borrower’s home at the time the loan is repaid (this is due to the Federal Housing Association, or FHA, being the insurer of the program called HECM, or Home Equity Conversion Mortgage).

There are a ton of fine points but reverse mortgages have evolved.  With the right advice from a true fiduciary Financial Planner (and not merely a mortgage broker) these instruments can be a prudent tool for a house-rich person looking to plan for healthcare or other costs while keeping the dream of retirement and peace of mind alive.

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