Reverse mortgages are an issue that is becoming more talked about as people are retiring while still owing money on their homes.
Reverse mortgages are available to people over 62 years old that are in need of some liquidity to pay off their expenses, make improvements to their homes, pay off an existing mortgage or even health care expenses. The difference between a standard mortgage and a reverse mortgage is that instead of making monthly loan repayments that debt is recuperated after the passing of the homeowner. The reverse mortgage is paid once the house is sold or if the home is no longer the primary residence of the homeowner (ex. Homeowner has to live in an assisted living facility). Recently there was a change in the regulations on reverse mortgages allowing a surviving spouse to remain in the home during her life, but that surviving spouse forfeits the rights to the proceeds. The proceeds from a reverse mortgage are generally tax-free and do not affect your Social Security or Medicare benefits. It seems like free money, but the cost is great.
The interest on a reverse mortgage is charged on the outstanding balance and is added to the amount owed each month. Therefore, the amount owed continues to grow while the debt is outstanding and high interest rates accrue. Additionally, reverse mortgages have origination fees and other fees that substantially affect the size of the debt.
Often times a reverse mortgage is worth the value of the house at the time of sale. Beneficiaries of an estate will sell a house, but once the reverse mortgage is satisfied the proceeds are barely enough to cover the cost of the probate administration. If the sale of the house is insufficient to satisfy the mortgage the heirs of the estate must decide to pay the debt “out of pocket” to save the house or allow the house to be foreclosed on and lose the property.
A reverse mortgage payback provision may also be triggered if someone is living outside his or her home for more than twelve months. This includes admission into an assisted living facility or nursing home. If you are unable to live in your home but are still alive you are responsible for the loan re-payment. If you are forced to enter a long-term care facility, chances are finances are an issue and having to deal with high repayments could be a real strain.
A reverse mortgage would be beneficial to someone who is over 62, in need of fast liquidity and has no heirs. Otherwise it is a line of credit with high fees that puts your home at risk. It would be better to downsize to a home that does not put a strain on your budget than to potentially forfeit your home.