Reverse Mortgages Decoded
Many people have heard of reverse mortgages, but few people seem to know how they really work. Here's the scoop. In order to qualify for a reverse mortgage you must be at least 62, and must own a residence with equity in it. Then, the easy way to get a handle on reverse mortgages is to think of them as just that, the reverse of typical mortgages. The standard mortgage calls for us to make payments to a lender, while a reverse mortgage involves the lender making payments to us (I'll use this hypothetical reference solely for convenience!).
If that sounds a little too good to be true, it may be. True, if we qualify for a reverse mortgage, we can receive a lump sum or monthly payments (sort of like Social Security), with our residence as the security for what's paid out. True, there's no income test or credit check like for a regular mortgage - after all, these are often used for raising funds to live on when we don't have other resources. And true, we don't have to repay the funds as long as we live, as long as we don't sell or move away from the residence, as long as we pay the real estate taxes and homeowner's insurance, and as long as we don't lay waste to the place (say, by letting a menagerie of animals use it as a large cage). Plus, we still own the residence, and don't have to sign it over to the lender. Many people seem to think that. Believe me, if lenders took ownership of all these places, no lender would be in this business!
So, what is the downside? Well, if we do any of those things I just mentioned, including dying someday many years hence, the funds the lender has paid out have to be paid back, and with interest - or the lender can foreclose just like it would if we defaulted on a regular mortgage. Perhaps the most serious downside, though, is that reverse mortgages tend to be expensive, and I don't mean the interest rate. The lender often charges up to 2% of the value of the residence, no matter how much the mortgage amount is. That means a residence worth $200,000 could trigger costs of $4,000, even though the mortgage amount was only $100,000.
Then what are the alternatives? First would be waiting to turn to a reverse mortgage as long as possible. That's not only because of the potential costs, but because the sooner we start using up the equity in our homes, the greater the chance we may run the gas tank dry before the race is over, so to speak. Also, if our credit is good and we can qualify for a regular mortgage or equity line, we'll probably save on costs. We could also sell our residence, put the resulting funds to work for us (a tall order these days, for sure), and rent a place that might be cheaper and reduce our utilities and maintenance costs. If we really don't want to move, we could buddy up, like college students, and bring in a sibling or friend we could tolerate, to share expenses and perhaps even provide scintillating conversation. I suggest a trial period for that last idea; we don't want to be battling for the remote in our golden years!
Posted 09/28/2012
If that sounds a little too good to be true, it may be. True, if we qualify for a reverse mortgage, we can receive a lump sum or monthly payments (sort of like Social Security), with our residence as the security for what's paid out. True, there's no income test or credit check like for a regular mortgage - after all, these are often used for raising funds to live on when we don't have other resources. And true, we don't have to repay the funds as long as we live, as long as we don't sell or move away from the residence, as long as we pay the real estate taxes and homeowner's insurance, and as long as we don't lay waste to the place (say, by letting a menagerie of animals use it as a large cage). Plus, we still own the residence, and don't have to sign it over to the lender. Many people seem to think that. Believe me, if lenders took ownership of all these places, no lender would be in this business!
So, what is the downside? Well, if we do any of those things I just mentioned, including dying someday many years hence, the funds the lender has paid out have to be paid back, and with interest - or the lender can foreclose just like it would if we defaulted on a regular mortgage. Perhaps the most serious downside, though, is that reverse mortgages tend to be expensive, and I don't mean the interest rate. The lender often charges up to 2% of the value of the residence, no matter how much the mortgage amount is. That means a residence worth $200,000 could trigger costs of $4,000, even though the mortgage amount was only $100,000.
Then what are the alternatives? First would be waiting to turn to a reverse mortgage as long as possible. That's not only because of the potential costs, but because the sooner we start using up the equity in our homes, the greater the chance we may run the gas tank dry before the race is over, so to speak. Also, if our credit is good and we can qualify for a regular mortgage or equity line, we'll probably save on costs. We could also sell our residence, put the resulting funds to work for us (a tall order these days, for sure), and rent a place that might be cheaper and reduce our utilities and maintenance costs. If we really don't want to move, we could buddy up, like college students, and bring in a sibling or friend we could tolerate, to share expenses and perhaps even provide scintillating conversation. I suggest a trial period for that last idea; we don't want to be battling for the remote in our golden years!
Posted 09/28/2012