Monthly Archives: February 2016

Reverse Mortgage: Lifeline or Liability

One of the options available to seniors who own their home and are over the age of 62 is a reverse mortgage. Administered as a federal program under the Housing and Urban Development (HUD), a reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash (i.e., lump sum, line of credit, or monthly payments). But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer uses the home as their principal residence or fail to meet the obligations of the mortgage. Regardless of the total amount of payments received or future value of the home, the homeowner or their heirs will never have to pay more than the outstanding loan balance. And since the proceeds received from a reverse mortgage are considered loan advances, the income isn’t taxable.  Because of these benefits, more seniors over the past decade, especially younger ones between the ages of 62-69 have been using this lifeline to finance their retirement  (see chart below).

Reverse-MortgageSo what’s the downside? Closing costs for a reverse mortgage are very high and can be double the amount of a conventional mortgage. In addition, the borrower is still responsible for all the typical cost associated with owning a house (e.g., property taxes, homeowners insurance, utilities, maintenance and repairs, etc.). Finally, the loan must be repaid after you die or leave the home. In the event you or your heirs can’t repay the loan, the house must be sold and the proceeds used to pay off the loan. If the house is worth less than the outstanding loan, the heirs are not responsible for the difference unlike a conventional mortgage loan. On the flip side, if the home is sold for more than the outstanding loan, the owner(s) or heir(s) will receive the net profit. As for the amount you’ll receive from a reverse mortgage, it depends on your age, interest rates, current equity in the home, appraised value of the home, and the payment options you select. Based on this criteria, the total amount available from a reverse mortgage could be as little as 50% of the home’s current value so make sure this makes sense for your particular financial situation before signing on the dotted line.

If you’re curious as to how much money you could get from a reverse mortgage, try an online reverse mortgage calculator like the one at (www.rmaarp.com). This calculator from the American Association of Retired Persons (AARP) is very straightforward and will give you an estimate of how much cash you can get from your home though a lump-sum or monthly payments. As mentioned above, don’t be surprised that the amount you qualify for is a lot less than the value of your home. In fact, the amount you actually qualify for could be even less since the calculator is based on your estimated value versus the lender’s appraisal, which will definitely be lower. Also, the maximum amount you can borrow/qualify for is limited by state, and even county, regardless of the value of your home. Even though you have various options as to how you can receive your payments, the best one is to take the payments over your life, as this is income you don’t want to outlive.

If you’re interested in reverse mortgages, contact HUD directly at 1-800-569-4287 or visit their website at (www.hud.gov/counseling), and they’ll give you the name and phone number of a local HUD-approved nonprofit housing counseling agency that will walk you through the process and provide names of participating lenders. Even though this is the best way to avoid scams, fees still vary by lender, so shop around for the best deal.

One final point on reverse mortgages:  Although this is an option at your disposal, it’s one that should not be part of your retirement plan but rather a last resort if your portfolio is being depleted too quickly and you’re running out of assets to cover your expenses. You’re better off focusing your immediate attention on saving for your future versus using a reverse mortgage to reduce the amount of money you need to save prior to retirement. Of course, if circumstances change while you’re in the latter years of your retirement, a reverse mortgage may be the safety net you need.