The reverse mortgage can be a good choice for some older people on fixed incomes who want to stay in their homes or improve their lifestyles.
Elizabeth Warren and her husband Thomas made mortgage payments faithfully every month on their home in Key West, their home loan had come from the bank where. Elizabeth was employed. Then in 2014, she had a life-changing medical event that forced her to quit working. She also got a notice that the bank was raising her interest rate. The couple looked around for a way out of their financial dilemma. “I knew about reverse mortgages, and I thought one might be right for us,” she said.
A Special Kind of Loan A reverse mortgage is a loan that allows older homeowners, the minimum age is 62, to convert some of their equity into cash. Instead of the borrower making a payment to the lender, the lender makes a payment to the borrower, and the payments are typically tax free.
The borrower’s age, the value of the property and the interest rates determine the amount of the loan. The borrower remains responsible for taxes and maintenance costs on the home, although depending on the amount of equity, the borrower may be able to get a loan large enough to cover those costs. The loan does not have to be paid back until the home is vacated.
Reverse mortgages can be a good choice for some older people on fixed incomes who want to stay in their homes or improve their lifestyles. “People used to look at them as the last choice, but that’s no longer true,” said Michael Branson, CEO of All Reverse Mortgage, a company licensed in Florida and the lender that gave the Warrens their loan.
“Today, people use them for a lot of different reasons, they may want to eliminate mortgage payments, pay off an existing loan, or get a line of credit to upgrade their home or make it handicap accessible.” Jack Winston, a real estate consultant in Miami, said that for some people, a reverse mortgage can be an important tool.
“A lot of seniors today no longer have the retirement savings they had, or they haven’t saved enough for retirement, but they do have equity in their home,” he said. “They can tap into that money and live adequately on their retirement.” One caveat: “The idea is that you live in the house until you die,” Winston said. “You don’t live in it for a few years and then resell it.”
Not for Everyone
A reverse mortgage is not right for everyone. “Some people don’t understand that it’s a loan like any other loan,” Branson said. “If you want to pass the property on to your heirs with the highest amount of equity, it’s not for you.” Interest continues to accrue on the loan and goes back into the balance, so the amount gets larger, not smaller, over time.
“Every month, my principle goes up,” Warren said. On the other hand, if the borrower gets the reverse mortgage for a line of credit and uses only part or none of it immediately, the accrued interest plus the cost of the mortgage insurance premium go into the amount of available credit, so the borrower’s credit line rises. “Some people use it as a financial planning tool,” Branson said”
A reverse mortgage involves risks to the lender, so the interest rate may be higher than on a traditional mortgage. There are also closing costs, which are likely to be significant. In the Warrens’ case, the lender added the closing costs to the loan, so the couple did not have to pay them upfront.
When the Loan Comes Due
The loan is paid back when the home is sold. For married couples, it is often best to have both names on the contract. If a spouse’s name is not on the mortgage, he or she will probably have to move out when his or her partner dies. When the loan comes due, the heirs have some choices: If the property has increased in value, they can sell it like any other home and pay off the loan. Suppose property values have dropped?
“If the property is worth less than the loan, they can pay off 95 percent of the current market value or the amount owed, whichever is less,” Branson said. “Or they can walk away from it. The lender can’t go after their other assets, and it won’t affect their credit rating.” The Warrens spoke to each of their children before getting the reverse mortgage, and all of them agreed it was a good idea.
“I’m so happy we did it,” Elizabeth said. “It’s such a relief not have to worry about mortgage payments. If you qualify, this is the way to go.