As our population ages and property values and the cost of living continue to rise, some homeowners have taken or may be thinking of taking advantage of a reverse mortgage option. A reverse mortgage allows the homeowner to take a monthly draw from the equity they carry in their home, increasing their monthly cash flow but reducing the equity in their home. At the end of the borrowers tenancy in the home, either at death or if they move into assisted living, the mortgage company sells the home to fulfill the remaining obligation of the mortgage. The amount of the lien against the property, including any fees and interest that has accrued over the years, will be taken from the proceeds of the sale. Any remaining value from the sale then goes to the previous homeowner, or their heirs.
The reverse mortgage was once considered a loan of last resort. Intended for the elderly to extend their period of financial independence; helping them to afford the mounting costs of healthcare, or aide in supplementing their retirement savings.
There are also ‘single purpose reverse mortgages’ offered by some state and local government agencies, which allow homeowners to draw against their property for instances of required home repairs, improvements, or property taxes. According to the MetLife Mature Market Institute, 20% of reverse mortgage borrowers are between the ages of 62-64, and over half are under the age of 70.
While there are risks in taking out a reverse mortgage, under the right circumstances they can be a good, generally tax free source of income for older individuals. Additionally, a homeowner will never owe more than your home is worth and the payments will not affect ones Medicare of social security benefits. The AARP (formerly the American Association of Retired Persons) recommends to its members that if they are in their seventies and have a substantial nest egg, the reverse mortgage may be a consideration to bolster their income and free up their cash savings for other investments.
One caveat to the reverse mortgage is the requirement that the homeowner continue to pay any property taxes and insurance on the home. Failure to meet this obligation due to financial or other reasons means the bank can foreclose on the property.
According to the US Department of Housing and Urban Development (HUD,) approximately 8% of reverse mortgages end in default. If a household is occupied by a married couple and only one spouse is on the loan and the spouse who is not on the loan ends up as the surviving spouse, the bank will still require immediate repayment upon the death or relocation of the borrower. If the surviving spouse is unable to pay back the loan, the house will be sold out from under them.
If you or someone you know are unsure if a reverse mortgage is the right choice, it is always best to consult with several financial professionals before committing to any major financial obligation. While I am not a loan consultant, if you need help finding the right person to talk to I would be happy to facilitate the help you or your loved one needs.