Moving Forward with Reverse Mortgages
Reverse mortgages can be a great financial tool for the right candidate. But who is eligible to apply, and how will it affect your estate?
Reverse mortgages often elicit mixed reactions. For some, they may seem almost too good to be true; for others, they’re daunting and unfamiliar. But as with any financial decision, it’s important to get all the facts first.
A reverse mortgage is a loan against the equity of your home that doesn’t require repayment as long as you live there. The money you receive from a reverse mortgage can be paid to you all at once, in a line of credit, in monthly installments or any combination desired (see “Reverse Mortgages: A Primer”). These mortgages can help homeowners who are 62 years or older maintain their standard of living and remain in their homes.
“Reverse mortgages can help seniors live in their homes as long as possible and can help them do that comfortably,” says Ed Pawelski, Loan Originator at First Midwest’s Joliet Stadium branch. “It’s a win-win scenario.”
According to Pawelski, the money from a reverse mortgage can be used “for any purpose that will improve your quality of life.”
Because the funds can be provided as a line of credit, if the funds are not withdrawn, the amount of the line will continue to grow and may be withdrawn at any time, he says.
“What this means is if you had $100,000 available in a line of credit, based upon today’s rates, it would increase to approximately $183,000 in 10 years if you did not access any of the funds,” Pawelski says. “If today’s rates increase, you benefit as the line of credit grows much faster.”
Effects on Estate Planning
Money from a reverse mortgage can be a cost-effective way to distribute your assets. “Some individuals would like to dispose of the equity in their home now and give it to their children while they’re still alive,” explains Pawelski.
Funds from a reverse mortgage are typically tax-free because they are loan proceeds. “The reverse mortgage can create liquidity by releasing funds to invest in other areas of a senior’s life,” Pawelski says. “They can also be used as an accompaniment to estate planning, but should be coordinated with the appropriate financial, tax, legal and insurance professionals.”
Although reverse mortgages can be a cost-effective way to distribute assets to heirs, they also can exhaust a home’s equity before heirs are able to receive it. If you have a reverse mortgage and you pass away before the home’s equity is exhausted, your heirs will receive whatever equity remains after the home is sold. This is a non-recourse loan, meaning there is no personal liability to you or your estate because the Department of Housing and Urban Development mitigates any shortages.
It’s important to be aware of all the potential effects on your finances and estate, both positive and negative, before pursuing a reverse mortgage.
Find the Right Fit
As with any financial product, it’s important that the client explores all options to find the right fit. Although the costs of obtaining a reverse mortgage have decreased substantially, Pawelski says, they still carry fees, and you must continue paying real estate taxes and insurance on the property. A home equity loan or traditional bank loan might be a better option if you qualify and can afford the monthly payments. But if you cannot obtain conventional financing – which is predicated upon credit scores, loan value, earnings and repayment ability – a reverse mortgage is a viable alternative because there are no credit score or income requirements.
Ultimately, Pawelski says, a reverse mortgage can offer a great quality of life and liquidity to those who want to remain in their homes for the rest of their lives.