For many seniors the equity in their home is their largest asset, but it is unavailable for their needs unless they take out a home-equity loan – but that is money that must be paid back with interest.
Reverse mortgages have been touted as a risk-free way of tapping into home equity, without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments to a lender, the cash flow is reversed and the homeowner, who must be aged 62 or older, receives payments from the bank.
Many seniors are finding they can use a reverse mortgage to pay off debt, buy a second home or just supplement their income – and seniors are still discovering new uses for another income stream. In fact, over the last five years the number of reverse mortgages nationwide has tripled.
But a reverse mortgage is not just for the wealthy, it may serve a purpose for the senior citizen who owns a home, but has limited income, as it can allow them to remain in the home by providing money for home modifications or even home health services that may not otherwise be covered.
It’s important to realize that there are drawbacks to reverse mortgages, as the fees can be pricey and, unlike a regular mortgage that pays down your debt, a reverse mortgage is actually building debt. If you plan on only taking out a small portion of money or plan on living in your home for only a short time, then the associated fees and costs can push the effective rate of the loan considerably higher. There are also scams and misinformation that can surround reverse mortgages, so it is important to do your homework.
A major disadvantage to consider also is the possibility of applying for need-based government benefits, such as Medicaid – often your home is considered ‘exempt’ or ‘non-countable’ while the proceeds of a reverse mortgage will not be.
It is also important to realize that in terms of estate planning, you are reducing the size of the estate that will be left to your heirs. You should also speak with your estate planning attorney to see if this income will impact any other aspects of your estate plan.
A reverse mortgage may be useful to some senior homeowners, but it needs to fit within your estate plan, and you should speak with a trusted advisor before taking this on, as it not only impacts your future, but the future of your heirs as well.
Michael Robinson, Estate Planning Attorney
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