Reverse Mortgages: best friend, worst enemy
As the population ages, more homeowners are finding themselves house-rich and cash-poor. Does the Reverse Mortgage hold an answer? Considering that the family home often represents 75% or more of one’s assets it is certainly an idea worth exploring, for the Reverse Mortgage offers a way of freeing up some of the equity in your home without your having to sell or move.
With a Reverse Mortgage - as with a traditional mortgage - the homeowner borrows money with the property as collateral. Unlike a regular mortgage, however, the debt piles up instead of being paid down month by month.
The mortgage is paid off at a later date, usually when the house is sold. Meanwhile, the borrower gets some cash while retaining ownership of the house.
The money you actually receive can be taken as a lump sum and/or a regular series of payments called an annuity. The annuity can be for a set number of years - term annuity - or for life.
Typically you can borrow up to 40% of the value of your home. The older you are the more you’ll be able to borrow. The income you receive will be a factor of your age, current interest rates, and how big an annuity you buy.
The Reverse Mortgage, then, allows you to stay in your home rather than be forced to sell or rent. It can provide for an income supplement, travel, or home care expenses. It can also serve as an estate planning tool, allowing the passing on of money to children now - perhaps allowing them to buy their own home - rather than years later as an inheritance.
But are Reverse Mortgages for everybody? Almost certainly not. All other money alternatives should be investigated first, such as selling and moving to a less expensive property as you’ll face a substantial interest penalty if you want to pay the mortgage off early. And you may find that the compounding interest on your loan has quickly eaten up a surprisingly large chunk of your home’s worth, especially if the house hasn’t increased substantially in value.
The decision may hinge on how badly you want to stay in your home. If you love it and none other will do, the Reverse Mortgage may be a solution. If another home will do, a Reverse Mortgage probably isn’t appropriate.
Consider: will your home and neighbourhood remain suitable to you as you grow older? Are you comfortable with the debt? Can you afford the potential penalties? A life or term annuity? (Life annuities are best for those 70 and older; those closer to 60 might want to consider a term annuity as your longer life expectancy will greatly reduce the size of your payments.)
A Reverse Mortgage is definitely not a solution to a short-term cash crunch. And its major drawback is that it reduces the size of the estate you’ll leave for your children.
And they can be complicated, each with advantages and disadvantages, so be sure to have any contract reviewed by an independent lawyer with experience in this type of transaction.
Add comment December 30th, 2006
