Is a Reverse Mortgage a Smart Solution?
Your parents' home may be their biggest asset, or perhaps second only to their retirement nest egg. Most people want to live at home for as long as they can as they get older. The mortgage industry has obliged by offering homeowners a product called a reverse mortgage.
What They Are and When They're Right
Unlike a typical mortgage loan, a reverse mortgage, which is usually available only to people age 62 and older, doesn't need to be paid back as long as the borrower lives in the home. Money from a reverse mortgage can be paid to the borrower as a lump sum, in monthly payments, as a credit line that can be accessed as needed, or in a combination of these ways. As funds are paid, they become a debt against the home's equity.
Many reverse mortgages are guaranteed by the U.S. Department of Housing and Urban Development and the Federal Housing authority. They often include a line of credit that can increase if the value of the house increases. It's important to seek the advice of an independent financial planner before buying a reverse mortgage.
What's in the Fine Print
Since the loan isn't paid, in the form of a sale by the bank, until the homeowner leaves the home, the bank won't offer a loan equal to the full equity in the property. That's because, although resident homeowners don't need to make payments while they are living in the home, interest still accrues against the home value. The loan plus the interest is then paid off when the house is finally sold. Any value remaining after the sale goes back to the original homeowner or his estate.
Since the resident still owns the home, he is still responsible for maintenance, real estate taxes, and insurance on the home. Because these are often the biggest expenses paid by retirees, many people decide that selling the home — and getting the full value instead of the discounted reverse mortgage value — is a better option.
Trends to Watch
Reverse mortgages have only been around for about twenty years. This may seem like plenty of time to shake out the bugs, but that period is insignificant for a financial product that relies on the kind of complex mortality and economic projections and estimates that reverse mortgages do. At the moment, the fees and limited size of these loans are serious deterrents from making them appropriate for most people's circumstances. Stay tuned; fees could drop and features improve enough that they will soon become a viable way of accessing the value in your parents' home.
