Reverse Mortgages Are An Under-Utilized Resource. What is the best kind of loan to get? One that you don't have to repay until you die. Perhaps that is not totally true of reverse mortgages but it comes close if your plan is to live out the rest of your life in your present home. Of course plans can change. In the event of the death of a spouse, you can stay in your home if you desire; however, if you decide to move the loan is due and payable. If you are forced to move to a skilled nursing facility for health reasons, the loan is due and payable when you or your spouse no longer occupy the home as your primary residence.
Use your Home Equity for Income. If an income stream is what you want, your home must be free, or nearly free, of encumbrances. You can get an idea of how the income option works at www.maarp.com/estimates.asp. As an example, suppose you own a free and clear $200,000 home in my Texas zip code of 77663. Suppose your date of birth is January of 1938 and your spouse birth date is August of 1941. Using the above website, I determined that my spouse and I could get an income stream of $617 per month for life, or as long one of us lives, or until we decide to move out of the house. When this occurs, the mortgage must be repaid from other assets or sale of the property. You don't give up the benefits of ownership and any appreciation in value belongs to you or your heirs, providing there is sufficient equity to repay the mortgage. In the unlikely event that the mortgage is more than the value of the house, the loss belongs to the mortgage lender and not your estate. Since this income is borrowed money, you don't have to pay income tax on the funds received.
Use A Reverse Mortgage to Repay your Standard Mortgage. Many of the next generation of retirees will go into retirement with a mortgage on their residence. If you are one of these, you can use the reverse mortgage to repay that mortgage and you no longer have to make monthly payments. Suppose the couple in the previous example, owe $90,000 on their home. Suppose the loan is $90,000 with an interest rate of 6.5% and 10 years remaining. Payments on that loan are approximately $1022 per month. You can use a reverse mortgage to pay the loan and have an extra $1,022 to spend each month. Is this advisable? Each case is different depending on your life situation. If you took out a mortgage at a low interest rate with interest only payments for 5 years and you are facing huge increase in payments, the reverse mortgage can be a viable alternative. If the mortgage is too large to be repaid by the reverse mortgage, you might want to add cash. The freedom of no payments for as long as you live in the home may well be worth the cash expenditure.
Use A Reverse Mortgage When You Buy Your Home. Suppose you sold a free and clear $150,000 home and you have your heart set on a townhouse in a retirement community with considerable amenities. The only problem is that this home is $240,000. You can't tolerate the idea of making payments again and you can't get your hands on another $90,000 without having to access your IRA with considerable tax consequences or sell stock and incur huge capital gains. Further, suppose you have less than perfect credit and are not sure you can qualify for a conventional mortgage. You can borrow $90,000 on a reverse mortgage and move into your desired home with no payments. Poor credit is not a barrier to obtaining a reverse mortgage.
Reverse Mortgage Amounts Vary. A reverse mortgage is a complex product. The amount of money you can get depends on your age, the appraised value of your home, and the interest rate at the time of funding. In the current environment with higher short-term rates and falling appraisals, you may not be able to receive the benefits you could have obtained a couple of years ago. In general, the higher your appraisal and the lower the rates on one year treasuries, the more benefits you can obtain. Another barrier to the viability of reverse mortgages is the presence of a large first mortgage on the property. Since a lot of home owners pulled cash out of their residences during the recent low mortgage rate environment, many future retirees may be carrying larger mortgages into retirement. If the maximum reverse mortgage amount isn't sufficient to retire the current mortgage and the home owner doesn't have cash required to pay down the mortgage, a reverse mortgage won't be a viable option. If you are planning retirement in the near future, it may be to your advantage to look at your reverse mortgage options now and making a plan as to how you might use this option.
Disadvantages of Reverse Mortgages. There are many benefits to reverse mortgages however, there are some disadvantages. One of these is relatively high closing costs. Since these are paid with borrowed money, they become less significant over longer time frames; however, if you plan to move within two or three years, you probably don't want to incur a reverse mortgage. If your home has considerable sentimental value to family members, you may not want to incur a reverse mortgage, especially if there are few other assets in the estate to repay the mortgage should your family members want to keep it. One caveat is that there are occasional abuses of these mortgages. Some of these allow a lender to share in the appreciation of the property at the time of repayment. These are often accompanied by artificially low appraisals which make it appear as the home has appreciated more than it really has. Be extremely careful of who you do business with. You can obtain a lot of information from the web link cited above. Better yet, have a well informed advisor to help guide you through the process. Call or e-mail me if you would like me to be that advisor.
No comments:
Post a Comment