Before You Consider a Reverse Mortgage

Things to like and hate about reverse mortgages

Money in your home can be accessed through a reverse mortgage.
A reverse mortgage allows you to use the equity locked up in your home.. Ryan Etter / Getty Images

Nobody hesitates to take out a mortgage to buy their home. So what is the controversy around reverse mortgages all about?

Honestly, I don’t know. In the right situation, the benefits of a reverse mortgage can certainly outweigh the drawbacks.

A reverse mortgage is simply a tool that may allow you to stay in your home, rent free, while using some of your money that bought that home in the first place.

That being said, like any major financial decision, you want to do your homework before you determine if it is the right tool for you.

Below you'll find two things to like, one thing to hate, and five things you need to know about reverse mortgages.

Like:

1. Flexibility

A reverse mortgage gives you the ability to use home equity for “extras” such as an annual vacation, new car or home improvements. This flexibility comes from the ability to take out equity as a lump sum, fixed monthly payments, a line of credit, or any combination thereof.

Taking advantage of online calculators will give you an estimate of how much you can get when you input your zip code, age, home value and existing mortgage balance (if you have one).

2. Non recourse financing

This simply means the total amount owed can never exceed the current value of the home. When the home is sold, after paying off the reverse mortgage, remaining proceeds go to you and your estate.

Hate:

1. Sleazy sales tactics

If someone is trying to talk you into taking money out of your home to buy a financial product that will pay them a commission (such as an annuity), run for the hills.

Most people recommending such strategies are not financial planners. They are salespeople; one trick ponies, whose trick benefits them, not you.

There are times where it may make sense to use home equity to pursue other investments, but these strategies contain additional risk, and should only be used by sophisticated investors who fully understand and can afford the consequences.

Be aware of:

1. Moving after taking a reverse mortgage

Like any mortgage, there are origination fees and expenses incurred when taking a reverse mortgage. With a reverse mortgage rather than paying for these things out of pocket, the fees are just added to the balance of the loan. You want to amortize these expenses over the longest period possible.

If you plan on moving in the next 2-4 years, look for less expensive ways to borrow money before using a reverse mortgage.

2. Keeping the home in the family

Upon your death (or the second person to die if you are married) the reverse mortgage will have to be repaid. If there is not enough cash in your estate then your heirs may have to sell the property to pay off the loan.

If your intention is to keep the property in the family, you’ll want to make sure heirs will have the ability to pay off the loan, or refinance the property based on their credit application.

Look out for yourself first though. Keeping the home in the family may be nice, but if a reverse mortgage could give you the extra income you need to be comfortable then maybe that is what you should do.

3. Status of the real estate market

The amount of money you receive depends on your age and the appraised value of your home. Taking a reverse mortgage when the real estate market is in a slump means you’ll qualify for less.

On the other hand, if you take a reverse mortgage when the market is booming, then later decide to sell your home in a down market, you may have little equity left.

4. Ownership responsibilities

You always retain title (ownership) of the home. Thus, you are responsible for taxes and insurance and must keep the home well maintained. This works the same way as any mortgage. If you don't pay your taxes, you'll be in trouble.

5. Eligibility for medicaid

Any proceeds you receive from a reverse mortgage are tax free - which is great. However funds received will count as an asset or as income and may affect your eligibility for Medicaid. Proceeds will not affect Social Security or Medicare benefits.

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