I remember when I got into real estate, the market was very normal in Southern California. The Inland Empire was an affordable place to live so there were a lot of commuters as well as local economy workers. I first heard the term “Short Sale” in 2007 and I had no idea what it was. I learned quickly and it became very common. Another term I had no idea about was a reverse mortgage. Now this sounded like a horrible idea then, and I have continued my career believing a reverse mortgage is a really bad thing. Now, is that fair? Not really, I decided to do more research and see if it is ever really appropriate. I will try to give my unbiased research finding that talk about what have been stated to be the positives and negatives of a reverse mortgage.
Let me give you the definition of a reverse mortgage. A reverse mortgage or home equity conversion mortgage (HECM) is a type of home loan for older homeowners (62 years or older) that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner’s insurance. To go into a little more detail, it is a type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan.
Since I kind of put a bad taste in your mouth already I should start off with the negatives. That way we can end on a bright note. The cons of a reverse mortgage may be obvious. Negatives of a reverse mortgage: Fees are most often higher than a line of credit or other financial options. Interest Rates are almost always higher than a standard line of credit. If you have them, your heirs may not be able to inherit your home. The loan has to be paid off at your death, so typically the house has to be sold or your estate needs the cash to re-pay the loan. You have to re-pay the loan when you move it. If you are moved into a nursing home or medical facility and you are out of your home for a year or more, then you are required to re-pay the loan or sell the home. You’re still responsible for all other home costs including insurance, taxes, HOA fees, and maintenance.
Let’s talk about situations where a reverse mortgages can help. Reverse mortgages have a feature called a standby line of credit. How big this line of credit is depends on factors such as size of your mortgage, your age at the time of loan origination, and interest rates. It’s possible for someone with a mortgage-free home worth $500,000 to obtain a reverse mortgage line of credit worth nearly half his home equity, or $250,000. You can see how this would get someone out of a pinch and still keep equity in the home. One of the overlooked benefits of a reverse mortgage is that it’s a protective hedge against the value of your home. So your ability to borrow grows regardless of the price of your home. Even if the home price falls, you can keep generating retirement income. When the house eventually needs to be sold, such as after the death of the second spouse, your heirs won’t be responsible for the debt. In retirement, you could run into unexpected expenses. Your health could take a turn for the worse. A dear family member might need financial support. An injury or sickness might require long-term care, which is very costly.
So that is as positive as it gets. With a ton of equity in your home, it may be a good idea to follow some dreams that you wouldn’t be able to otherwise afford. The true benefit of a reverse mortgage is the fact that is is an option when you retire. If you spend a lifetime building equity in a home, it is a way to collect. Good luck everyone. Hope this helps someone make a great decision.