Reverse Mortgages DecodedMany 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 Still More Decisions!Recently, I passed on some thoughts about how to assess and choose the right folks to act for you if you're unable to tend to business yourself - whether that's with or without a pulse. Now I want to add some suggestions about what to do with those planning documents once you've made your choices and gotten them signed up. And let me take this opportunity to remind those of you who have unsigned drafts of documents in your possession that you really haven't made your choices yet. Until the documents are properly executed, they're not going to do you much more good than helping to get the wood stove started.
Right off the bat I'll say that you're going to be better served if your lawyer holds your original documents in a safe or vault at his or her office. Lawyers don't charge for doing so (they like keeping that connection with you!) and when you lose the copies they gave you when you signed the documents, they can make more copies for you from the originals, again without charge. I can't tell you how many times this happens - sometimes multiple times for the same folks. If you kept the originals and then lost them, that would be like not having signed them in the first place, and at some point it could be too late to fix the problem. Likewise, it's not a great solution to keep original documents in your safety deposit box. Sometimes those are hard for agents or family members to get into if the signature authority isn't set up just right, or maybe they'll have a hard time even finding the key. As for who else gets copies of the documents besides you, that's totally your call, but I also have some thoughts on that subject. Unequivocally, your primary and backup health care agents should have a copy of that document, as should your regular physician. It can't do any harm, because those documents are only activated once a medical decision is made that you aren't capable of acting for yourself. Plus, the rare but potential need for quick decision-making in a heart-stopping emergency trumps any desire to keep this document under lock and key. When it comes to all the other documents - durable powers of attorney, wills and trusts - my rule of thumb is, don't part with copies unless the time has arrived for the respective agents to take over. For POAs that means when you actually want the agent to take over for you in carrying out the duties and responsibilities you've conferred. Look at it this way, you wouldn't give someone your checkbook while you're still able to write checks, so until you want the agent to write them for you, don't turn over the authority to do so. Besides, writing checks for the cable bill generally isn't the kind of emergency that demands split-second action. I say hold onto copies of your wills and trusts, too, simply because passing them out to your beneficiaries can cause extreme awkwardness or damage relationships when you later decide to make critical changes. And nearly everyone will, at least once, decide that the kids need to be a wee bit older to be trusted with your life savings, or that Billy the nephew isn't really a worthy recipient of those precious fridge magnets after all. I mean, when you think about it, your wills and trusts are just works in process until you-know-when, and no one wants their first or second draft published. (Posted on September 14, 2012) |
Phil RunyonPhil Runyon has been practicing law in Peterborough, NH, for over 50 years. He has regularly sent out emails to his clients, keeping them updated on changes in the law that effect estate planning, and writing about other relevant concepts or planning techniques. Archives
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