Almost everyone is offering to lend you money these days based on the equity that you have built up in your home. Financial Institutions make references to home equity loans, home equity lines of credit and yes... reverse mortgages. In every scenario your home is the collateral and of course you can use the money as you wish but they all come with a price. $$
Many baby boomers have found themselves looking for cash after putting their kids through school and paying off their debts as well as spending on elaborate weddings and providing down payments for homes. Sure; they will pay us back; but when?† Boomers in their senior years want to enjoy life now, without going into debt and often find they are house-rich and cash-poor. A reverse mortgage sounds like the answer to provide the cash for those vacations and overdue home renos and upgrades. Is it really the way to go?
There are two types of Reverse Mortgages:
- 1. Lifetime Reverse Annuity Mortgages; a lifetime plan means that you donít have to repay the amount accessed during your lifetime. The principle and interest will be repaid by your estate, or should you decide to sell, it would be repaid by you.
- 2. Fixed Term Reversed Mortgages; as the name implies, must be repaid, principal and interest, at the end of a specific time period. This can vary but the loan must still be repaid with interest.
To qualify for a reverse mortgage you must be 60 years of age. If married both of you do not have to be 60; the older spouse would qualify for the mortgage. The loan is based on equity in the property therefore income is not a requirement. An appraisal of the property is mandatory, and the borrowers are counseled by the financial institution making sure they are fully aware of the benefits and pitfalls of what they are getting into.
The maximum loan amount depends on the age of the borrower. The older the borrower the larger the ratio; at this time he maximum is approximately 40% of the house value to a maximum of $500,000. ; with the typical reverse loan mortgage being around $75,000.
To cash strapped baby boomers, this may sound like the perfect solution, but before you start planning that exotic around-the world vacation or total reno, consider some of the pros and cons of this option.
On the pro side, the money borrowed through a reverse mortgage is tax-free. Also your credit rating (or lack of it) doesnít come into it and unlike lines of credit or regular mortgages, you wonít be asked to sell your home to settle the debt. If you previously qualified for benefits through the Old Age Security or Guaranteed Income Supplement programs, your eligibility for these programs is not affected by your reverse mortgage income. Finally, the amount owing will never exceed the fair market value of the home; your estate will never be asked to pony up any extra money to settle a reverse mortgage.
On the down side, as interest accrues over the years, equity decreases. The amount owning can double every 10 years so someone borrowing $100,000 through a reverse mortgage could end up owing $200,000 in 10 years and $400,000 in 20 years Ė a scary thought.
Another negative is that the interest rate on reverse mortgages is often higher than either a regular mortgage or a line of credit and you may have to pay an application fee, an appraisal fee and/or closing fees as well as legal costs. If you sell before three years, there is a stiff repayment penalty. So a spouse, anxious to move out of the family home after the death of a partner, may not be able to sell when he or she wishes without incurring a penalty.
Lastly, even when the housing market is strong and the family home appreciates over the 20-year life of a reverse mortgage, there still may not be much left for the heirs once the loan has been repaid. Whether or not this is an issue depends on your individual situation.
There may be a better way than selling the equity in your home. You could decide to reduce expenses and make the move to a smaller house or condo; as gut-wrenching as this decision can be, it often is the best possible solution. This could leave you with the extra cash to enjoy your senior years. We are all living longer with an improved outlook and quality of life; why not enjoy it.
To further discuss the pros, cons and options give me a call. I can also provide the resources from having your home appraised, providing a market evaluation, having your home de-cluttered and staged if required.