The boom in housing markets across the country has made many older Americans house-rich and cash-poor. Reverse mortgages provide a way for seniors to tap their home equity for home improvements, health care expenses, and additional retirement income.
As the name implies, a reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, you borrow a sum of money to purchase a home, then pay off the debt over time.
With a reverse mortgage, you receive loan proceeds - as a lump-sum payout, an annuity, a line of credit, or a combination of all three - but make no payments as long as you reside in the property. The loan, with any accrued interest, comes due when you move out or pass away.
To qualify for a reverse mortgage, you need to be at least 62 years old and own the home outright (or have a balance that can be paid off with the loan proceeds). How much you can borrow depends on your age, the home's market value, and interest rates.
When applying for a reverse mortgage, you don't have to prove you have enough income to make monthly payments (there aren't any). Also, neither you nor your heirs will have to scrounge for money to repay the loan. That's because the loan balance to be repaid can't exceed the home's value. If, for example, you pass away when the home is worth $250,000 but the loan balance is $300,000, your heirs will owe the lower amount.
But there's also a downside. Closing costs on a reverse mortgage can be very steep, often as high as 8% of the home's value.
In addition, borrowers may have to purchase mortgage insurance, and they're still on the hook for property taxes and homeowner's insurance. Moreover, some reverse mortgages require full payment of the loan balance (plus accrued interest) if the home is vacated for a specified period of time.
If you end up making a prolonged, but temporary, stay in a nursing home, your loan could come due. Another factor to consider is how the loan proceeds might affect your Medicaid eligibility.
It pays to do your research when considering a reverse mortgage. If you need help, give us a call.
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