For many seniors, their home is their largest asset and is the one place they wish to remain for their best quality of life and peace of mind. However, more people are entering retirement with a mortgage or equity loan still remaining on that home – and cash flow can get pretty tight when relying on social security, a modest pension, or decreasing investment accounts. If medical bills have to be juggled or home improvements need to be made too, then it often seems the only recourse is to reluctantly sell that home and move in with family or into a rental environment.
Reverse mortgages are one of many planning tools, and while they may not be appropriate for some people they can be a great solution for others when used correctly. Here are some benefits to consider:
- When the homeowner(s) are age 62 or older, a reverse mortgage can provide relief from the first mortgage or equity loan payments AND often provide a pool of cash available to help take care of improvements or modifications that may assist in allowing the owner to comfortably remain in the house.
- Once any existing liabilities are paid off with the reverse mortgage, the remaining calculated cash value available can be accessed as a lump sum or periodic payments – allowing the owner to make some independent choices.
- Obtaining a reverse mortgage is a process…and to help seniors and their families properly evaluate whether this is an appropriate solution there are multiple steps of counseling with a trained, third party professional and a review each individual’s financial situation and needs. It’s also a good idea to have your CPA, CFP, or other independent professional take a look at the computations too for your peace of mind.
- Just as with a ‘regular’ mortgage, there are fees involved with a reverse mortgage (the lending institution has to cover their costs to stay in business and service the loan). But part of the fees paid are really an ‘insurance premium’ or ‘guarantee’ that the cash available to the homeowner cannot be decreased or taken away due to the home value changing downward after the mortgage has closed. Keep this in mind when evaluating the overall benefit with this tool.
- The homeowners listed on the reverse mortgage continue to own the home and can remain in the home for their entire lives. Just as with a conventional mortgage, though, remember that property taxes and other home-related obligations must be kept current in order to meet state and local ownership provisions. If you want a younger family member or other potential beneficiary to have the home after your passing, then it will be necessary to make other estate planning provisions for them to have the cash necessary to purchase the property based on the reverse mortgage balance (and property taxes) due at that time. Or your executor may choose to sell the home outright to an unrelated party for the fair market value at that time and the reverse mortgage would be retired.
The reverse mortgage tool may be beneficial for other planning needs too, so be sure to consult your own financial planner and an experienced reverse mortgage professional for additional details and a personal assessment before making any decision one way or the other.
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