As soon as we sat down, the first thing he asked me was whether or not I was interested in a reverse mortgage. I declined, and about a week later I met another mortgage broker and that was the first thing he asked me.
There are some positives to reverse mortgages.
For instance, Medicare and Social Security benefits are not usually affected by the income a reverse mortgage provides. A reverse mortgage is also great for seniors who wish to get some equity out of their houses – and it does turn into a source of income, either as a lump sum or monthly payment – but as they say, the devil is in the details:
- A reverse mortgage is a loan. It may be an unusual loan in the sense that the homeowner does not have to make payments on it as long as he or she continues to live in the home. Instead, the reverse mortgage loan gets paid off when the residence is sold.
- Reverse mortgages are not based on income or credit score like a standard mortgage is. They are based solely on the homeowner’s equity in the house. Because of that, it is considered a higher risk loan, and the lender can charge higher fees and origination costs.
- The interest rates on reverse mortgage loans are higher than they are for either home equity loans or mortgages.
- Most reverse mortgage loans’ rates are tied to a particular financial index and are likely to fluctuate with the market.
- The homeowner is still responsible to pay the real estate tax, mortgage insurance and homeowner’s insurance in addition to making all necessary repairs.
- In order to avoid making payments on the loan, the homeowner must be living in the residence covered by the reverse mortgage, as his or her primary residence. If he or she moves into a nursing home, payments on the reverse mortgage will become due at the same time.
- The heirs will lose out. The majority of reverse mortgage contracts contain a “nonrecourse clause,” which prevents the homeowner’s heirs from owing more than the value of the home when it becomes due. However, if the homeowner’s heirs want to keep the home, they will be required to repay the loan in full – even if the outstanding balance on the loan is greater than the value of the home.
We’ve all heard the saying “it it looks too good to be true, it probably is.” I look at reverse mortgages the same way. In all the promotional material given to me, I saw nothing about the fact that going into a nursing home would create a huge loan payment due every month.
I don’t think a reverse mortgage is a prudent move for people planning their estates, but do not take my word for it. Talking to a good trusts and estates attorney is the only way for you to tailor your plan to fit your unique goals and desires.
Judith Heft, Principal, Judith Heft & Associates is a personal financial concierge with offices in Greenwich and Stamford. She can be contacted via email at [email protected] or by phone 203-978-1858.