Advantages, Disadvantages of Reverse Mortgages
For those approaching retirement,
finances can be a big concern - one that can be alleviated for many
Those homes, whether or not they now carry a mortgage, can be turned
A reverse mortgage is a loan against your home that you don't have
to pay back as long as you live in the house. Funds may be used as
A reverse mortgage sounds like a good idea at first, but it's important
to weigh benefits against costs: What types of cash advances are provided?
How much money can you get in each type?
What are itemized and hidden costs? What's left at the end of the
Take a good look at your lifestyle, health and retirement needs, as
this is not for everyone.
A reverse mortgage is not a home equity loan. With a reverse mortgage,
the homeowner does not qualify with a certain monthly income or make
monthly payments; lenders look to the home's value for repayment.
Cash advances can be taken as lump sums, credit lines or monthly advances,
or in a combination. These are annuity advances and, unlike loan advances,
are partially taxable.
Under certain circumstances, they may also make the homeowner ineligible
for (or greatly reduce cash benefits from) various government health
care programs. In the Supplemental Security Income program, annuity
advances can reduce benefits dollar-for-dollar.
You or your spouse may be a candidate for Medicaid benefits but increased
income from a reverse mortgage could eliminate that entitlement. Under
current regulations, the house is an exempt asset for eligibility
for Medicaid benefits if the "well spouse" still lives there. You
may be giving away more than you bargained for.
How will those fixed monthly loan advances look in 10 or 15 years
when the cost of living is higher?
The older you are at closing, the more money you can get under most
plans. If you are a "joint" borrower (if your spouse or someonene
co-owns your home) some programs use the age of the youngest borrower.
Others take an average.
If there is a mortgage, it must be paid off; that can be with the
proceeds of the reverse mortgage as part of the agreement. If your
existing mortgage rate is high, paying it off at a lower rate can
be an advantage. The opposite does not hold true.
The more equity you have in your home, the more money you are eligible
to get. Most plans place minimum or maximum limits on the amount of
equity they will lend against.
The more the loan costs, the less you get. The total cost of a reverse
mortgage is not as obvious as it may appear. If more of your equity
goes to the lender to cover loan costs, less is available to you.
Watch itemized costs that include origination fees, closing costs,
servicing fees, adjustable or fixed interest rates, insurance premiums
and maturity fees.
Some reverse mortgages include an itemized cost related to any increases
in the value of the home during the loan period. At the end of the
loan, the lender is awed an agreed-upon percentage of any increase
in the value since loan closing.
If you use the proceeds for updating and repairing, the lender shares
in the appreciation of the home and receives interest on the loan
you took for improvements.
For example, if your home is worth $100,000 at closing and $150,000
at loan end, its value has appreciated by $50,000. If you agreed to
pay 50 percent "shared appreciations," you could owe as much as $25,000
on this alone. Shared appreciation is generally charged in addition
to a fixed interest rate on loan advances.
Shared equity is an itemized cost that equals an agreed upon percentage
of the home's full value when you repay the loan. If the share is
10 percent, and your home at loan repayment equals $150,000, this
could be as much as $15,000. As an itemized cost, equity sharing is
being charged in addition to an adjustable interest rate without any
annual limit on rate charges.
The total amount owed on some reverse mortgages is based on a percentage
of the value of the home when the loan becomes due. You select the
percentage, ranging from 25 percent to 75 percent at loan closing.
The greater the percentage you choose, the greater your cash advances.
Loans with "percent of value" pricing can be costly in the short run.
You could owe up to 75 percent of your home's value after little more
than four years. But these loans can also end up being quite inexpensive
if you outlive your life expectancy.
Consider the disadvantages of reverse mortgages:
rates are higher than conventional mortgage rates.
do not allow for cost-of-living increases.
happens in the event of illness or the need for long-term
the house is sold, the lender gets the money back.
about the capital gains tax on the sale of the house? Will
you have the cash to cover the tax? Your potential gain may
exceed the one-time exclusion.
still think a reverse mortgage is for you, avoid getting "locked
in." Look for flexibility to update the contract. If that's
not possible, and you need additional funds, choose a conventional
mortgage at a lower rate and invest it.
Another possibility: consider gifting the house to children,
or sell the house to children (or others) with life interest.
Consider the tax consequences and effects on health care programs,
coverage and eligibility.
If you die, sell your home or move within a few years of closing,
the cost of the reverse mortgage can be extremely high.
Consult with an unbiased professional who specializes in legal,
financial and eldercare issues. Reverse annuity mortgages may
be ideal for some but may not meet your needs.