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Your Home Pays You Back with Reverse Mortgages

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The follow is a guest post by Tanesha Morgan a writer for Personal Finance Analyst. Personal Finance Analyst is an online community of bloggers dedicated to taking the mystery out of money and helping you to live a happier, more successful life with the money you have.

Lately, I have been seeing many advertisements about reverse mortgages.  From what I gather, it sounds like a pretty good deal.  As I understand it, once you reach the age of 62, you can tap into the equity of your home.  You can receive the equity as either monthly payments or as a lump sum.  And you never have to pay it back... as long as you do not sell the house.  However, upon death, the home is sold by the lender.  The mortgage company recoups its money out of the deal and the remainder goes to your heirs.

It seems like a good deal.  Many people are equity rich and cash poor.  And equity will not pay medical bills or afford you trips around the world.  However, a reverse mortgage does just the opposite... you'll be cash rich and equity poor.

The down fall though, you will be tapping into your children's potential inheritance.  But I don't think that is a bad thing.  I feel the same way about this as I do about whole life insurance.  When you are 60, 70, 80... your children ought to be self sufficient.  They should not be depending on your money to sustain them. I am sure adult children would be much happier to see their elderly parents enjoying the benefits of their years of hard work and sacrifice.  And besides, you'll have enough extra riches to invite them to Cape Town with you.

Anyhow, all I know about reverse mortgages is what I have seen on television.  So I decided I would learn a bit more about it for myself... the specs, the good and the bad.

The Specs

What is it?  A reverse mortgage is a home loan that allows the owner to convert their home equity into cash.  However, this is a special loan that is only made available to those 62 or older who own their home, or have a relatively low mortgage balance.  These loans can only be taken out on the home in which the borrower occupies.  There are different ways to receive loan payments... but in general, the borrower can get a lump sum or monthly payments.

The Good

Reverse mortgages allows your home to pay you back.  After taking 20 or more years to pay off a home, it is nice to have some real hard cash to show for your investment.  Reverse mortgages takes equity off paper and puts it into your pocket.

And as long as the borrower remains in the home, the loan does not have to be repaid.  Upon the death of the borrower, the home is sold and proceeds are used to repay the lender.  Remaining proceeds, if any, are distributed to the decedent's heirs.

If the loan is originated though a public lender, such as HUD, there may be a limitation on the use of the funds.  However, if you use a private lender, no such limitations exist.  You can use the money to supplement your retirement income, buy an RV, spoil the grandkids, pay medical bills... or anything else you come up with.

For tax purposes, the cash you receive under a reverse mortgage is not considered income.  This is great, especially for those seniors that are bordering on a higher tax bracket.

The Bad

There is a limit on the amount of money you can borrow under a reverse mortgage.  So even if you have a million dollars worth of home equity, you can't borrow more than the legally set ceiling.  The average national limit now is about $400,000.

Many people are deterred by the associated loan costs.  Private lenders typically charge application fees, servicing fees, appraisal fees, origination fess, high interest rates, closing costs... and fees, fees and more fees. However the Housing and Economic Recovery Act of 2008 has placed some restrictions on these fees.

One huge disadvantage to reverse mortgages is that you are increasing your debt and decreasing your home equity.  If the loan becomes due during a period of declining home values, you may owe more on the loan than what your home is worth.  But this should be of little concern, because in most economies, property values generally increase over time.

Overall, I like the whole concept of reverse mortgages.  The majority of most people's net worth is comprised of their home equity.  While home equity is a real asset, it is not tangible.  Transferring equity into a liquid asset can ease many financial burdens and can also improve a person's lifestyle.

Lazy Man's Take: - I'm not sure that anything with "fees, fees, and more fees" is a good deal. Another good option is to downsize into something with less maintenance. Of course downsizing has it's own set of fees: moving, selling a home, buying or renting a new one, etc.

Last updated on August 26, 2008.

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9 Responses to “Your Home Pays You Back with Reverse Mortgages”

  1. WealthBoy says:

    I think a reverse mortgage is a good idea. I’ve told my parents they should consider it. They’ve spent enough time in their life working for my benefit and my brother’s, and it is time for them to think about themselves. They can’t take it with them and they deserve to enjoy what they’ve worked for rather than leave it to me. My brother and I are their legacy, not the possessions they will leave behind.

  2. mobody says:

    My ex-father-in-law has a reverse mortgage. For him, it was a good resolution to a problem. When he retired at 63, he took a deal that would include benefits for his wife if he should die before her, but the pension payments were for a fixed period of time. Those benefits ran out two years ago, but his wife had a decent pension from the teachers union. Last year his wife died and all he has left is social security and his house.

    He got a reverse mortgage. He has funds to last him a while longer. At 83, the money should be enough to keep him till he dies.

    As for the kids inheritance? Yeah, they are pretty upset that they won’t be getting any, but both his sons are gainfully employed.

    In my opinion, once you are out of college, or maybe even high school, what your parents give you is a gift, not a right.

  3. irina says:

    Reverse mortgage could be a solution when you are completely disabled and I mean totally and permanently disabled. My husband is totally and permanently disabled but he doesn’t have to go that route because he got me to support him.:-)

    What about me? The first option for me, personally, will always be to look for a way to earn money. There are so many options to earn money now! Seniors should educated themselves about those money making options first. You have to do something all day anyway, why not earn a bit if you need the money!

    My mom is 75 yeas old. She lives in Russia where they have less options than we have here, in US. Even she earns well for herself, as she likes to say, 5 times her Russian government pension! If a 75 years old woman can earn in Russia, there are certainly more opportunities here, in the US.

    Reading, learning, talking to people, asking for advice, working for yourself, sticking with what you love and enjoy every minute of it is the key to live long and always have money to support yourself that long. :-)

  4. Jim says:

    I think a reverse mortgage may be a good idea in the situation where someone has limited retirement income. If you’re retired and having trouble getting by but own your home outright then I’d consider it. I don’t think inheritance should be a consideration either, supporting yourself in retirement takes precedent to leaving money to others.

    As an alternative I’d also consider selling the home outright and then renting.

    Jim

  5. Reverse mortgages worked wonderfully for Jeanne Calment, who got one when she was 90 and lived another 32 years.

  6. Dave says:

    Another alternative if you are house rich but cash poor is to sell off anticipated equity growth to a company such as Rex Co. Here’s the link:
    http://www.rexagreement.com/index.php

    You don’t have to be a certain age. It would seem to work if you lived in one of the “high rent” cities of the U.S. such as San Francisco or New York.

  7. One of the bigger disadvantages of this type of loan is when you want to leave your home to your heirs. The debt from the loan is passed on to them in the event you die. In most cases the home will need to be sold in order to pay off the reverse mortgage. Anything that is left over would go to them, but if you are looking to pass your home onto your heirs debt free, then this can be a major disadvantage and something you will really want to consider. Of course, if you have no immediate family then this is a moot point.

    Despite its advantages, it is important to understand the disadvantages of a reverse mortgage so that you can make a more informed decision on whether this loan is right for you. These are only two of the major issues and you should further check into them before deciding whether to proceed further. Don’t get me wrong, this loan is very beneficial in the right circumstances. You just need to do your homework to know if you fit the criteria.

  8. LAL says:

    Reverse mortgages are a great idea for people who refuse to leave their homes but have no money.

    Yes it’s better to downsize and sell but have you talked to people who refuse to do so? They are extra stubborn and refuse to do anything to help themselves.

    So let them take out the fees, fees, fees. There are other options but usually they want to stay in the house.

  9. Tanesha says:

    Reinder thanks for sharing the story of Jeanne Calment. I enjoy reading inspiring stories. I especially like the mention of her smoking until 117.

    Anyway, this story reminds me of someone I met not long ago. I was at the dentist office and I struck up a conversation with the woman next to me.

    I would have never asked her age, but she made a comment that that her granddaughter’s granddaughter was the the person who had brought her to the dentist’s office. Her granddaughter’s granddaughter?!? I thought how could that be… so I had to ask her age.

    I could tell that she was old, but would not have imagined that she was 106! She was picking up her dentures. :-)

    Her granddaughter’s granddaughter also had a child. How wonderful is it to live long enough to see five generations?

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