Reverse mortgages have become a popular option for seniors who would like to reap some of the benefits of the equity they have accumulated in their homes. However, it’s important to be aware of both the advantages and drawbacks to these loans.
The New Jersey Society of Certified Public Accountants (NJSCPA) explains how they work and the issues to consider:
A reverse mortgage is simply a different kind of home loan, one that is generally only available to people age 62 and over. Instead of borrowing to buy a house, the homeowner gets a loan based on the equity in a home he or she already owns. For example, you are nearing retirement and would like to add some extra income to your retirement savings; you own a home worth $200,000 with no outstanding mortgage on it. The bank offers you a reverse mortgage of $75,000. You can choose to receive the money in payments spread out over time – for example, monthly – or in a lump sum payment. You can also set up the loan as a line of credit you can tap into as needed.
Repayments do not need to be made until the home is sold or until you die or move, even if you outlive the loan term. And you do not have to move out of the home when the loan term ends. When the home is sold or you move out of it, you or your heirs must repay the $75,000 – with interest and fees – out of the sale proceeds.
Qualifying for a Reverse Mortgage
In addition to being age 62 or older, to qualify for a reverse mortgage you must own the home outright and live in it as your principal residence. If you have an existing mortgage on the home, it should be a relatively small one that you will pay off with some of the reverse mortgage proceeds. Your income is not a factor in the loan decision, since you will be receiving payments, not making them.
Consider the Disadvantages
A reverse mortgage can be a great way to free up equity in your home to use during retirement. However, they are not always advisable. They’re probably a better deal if you are in your 70s or older rather than in your 60s, in part, because the bank will likely be willing to give you a bigger loan because decisions are made based on your life expectancy.
In addition, if you expect to downsize, move closer to family or transition to an assisted-living or similar facility sometime in the future, remember that you will have to pay the loan amount back to the bank when you sell your home. That means you will have less money to spend on your next residence.
One of the biggest drawbacks of a reverse mortgage is its impact on the inheritance you leave. In our example above, after the $75,000 loan amount – plus interest and fees – is deducted from the value of a $200,000 home, there will be less money left for your heirs, a key issue to consider before taking this type of loan.
Read the Fine Print
It’s also important to ask questions about the responsibilities facing you down the road. Find out about the interest rate and fees on the loan and how much they will amount to when the mortgage is paid off. Especially with home values dropping during the last year, you don’t want to learn that the total amount you owe later is more than the value of your home.
Consult Your CPA
Reverse mortgages are generally made available under the U.S. Department of Housing and Urban Development’s Home Equity Conversion Mortgage Program. You can learn more by calling 800-569-4287 or going to the HUD website at www.hud.gov.
Contact your local CPA with any questions on important financial issues. He or she has the expertise to provide the advice you need. If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.
For more information on various personal financial matters, visit the NJSCPA’s public service website at www.MoneyMattersNJ.com. While visiting, you can subscribe to Your Money Matters, the NJSCPA’s free, monthly email newsletter to receive valuable personal financial planning advice throughout the year.
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