Reverse mortgages can be worthwhile; but, there’s no free lunch. Here are some issues to review.
A reverse mortgage is a loan against the value of your home that does not have to be paid back for as long as you live in the home. Simply put, a reverse mortgage converts some of the equity in your home into income. And, because it’s really loan proceeds you’re receiving, it’s free of income tax liability (be sure to talk with your tax advisor anyway).
But, remember, there’s no free lunch, and there are issues you should consider:
• Typically, a reverse mortgage must be a “first” mortgage, meaning that if you still owe money on your home, you must pay off the existing mortgage before you can get a reverse mortgage (note: an initial lump sum payment from a reverse mortgage can be used to pay off an existing mortgage).
• Keep in mind that, while you don’t have to repay a reverse mortgage for as long as you live in the house, the amount that ultimately has to be repaid does grow over time. So, your outstanding balance is growing each month – at a rate which may or may not keep pace with the home’s value or inflation. However…
• While the amount of debt grows over time, the reverse mortgage repayment cannot exceed the value of your home at the time it is ultimately sold.
• If you take out a reverse mortgage, you continue to own your home. This means that you continue to be responsible for expenses such as property taxes, hazard insurance and home maintenance and repair.
• Reverse mortgage proceeds may affect eligibility for assistance under state and federal programs.
• The upfront costs associated with a reverse mortgage, such as an origination fee, closing costs and mortgage insurance premium, can be significant. This means that a reverse mortgage may be expensive if the loan is repaid within a few years of closing. As a result, if you anticipate moving within a few years, you should explore another alternative, such as a home equity loan.
• Repayment of a reverse mortgage when your home is sold will mean less equity left to pass to your heirs.
Hope this helps!
Jim
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice.
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