ParentCare » Vol.18

Reverse Mortgages: Pros and Cons

By Tom McDavitt

More and more these days we hear about reverse mortgages. Conventional thinking has many us skeptical to say the least. After all, they are complex loans that are secured by our homes.  The most appealing  feature of the loan is that you do not have to make payments, assuming you are still living in the home. Your heirs will pay the loan balance after you pass away, usually with proceeds from the subsequent sale of the home.

It is critical that you understand risks and costs before you apply.  As a matter of fact, there is mandatory counseling required for an FHA-insured reverse mortgage.

Let’s start by looking at what a reverse mortgage is ~ it is a loan that lets you receive payments from the lender in a lump sum or in a stream of payments. The loan balance is only the amount which you have received plus interest. Therefore, it continues to grow even after you have ceased receiving payments. To be eligible, you must be a homeowner at least 62 years old with the loan against your primary residence only. You also must have either no current traditional mortgage or a balance that can be paid using the funds from the reverse mortgage.

The maximum loan available depends upon several factors including your age, your home’s value and the interest rate. Generally, the older you are the greater amount you can borrow relative to your home’s value.  Payments may be taken as a single lump sum, a stream of payments, or as needed similar to a credit card. You may also combine these options as long as you remain below the approved loan amount.

Reverse mortgages have both interest and fees charged over the life of the loan, as well as “closing costs.”  Interest rates are generally moderately higher than conventional mortgage rates.  You should also be aware that the loan could become due if you were to fail to pay taxes or insurance or if the home were to fall into disrepair.

All that being said, reverse mortgages can be a savior for those people on a limited income with large amounts of equity in their home. It can allow you to avoid the sale of the home if money runs short. They are best suited to someone who plans to remain in the home for the balance of his or her lifetime, which will reduce the overall impact of the upfront costs. Personally, I have seen several examples in my practice of seniors who took reverse mortgages and now enjoy much better lifestyles than they did previously. Yes, they will leave less in their estates for the next generation, but they worked long and hard to gain that equity and their self interests sometimes have to be the first priority!

Tom McDavitt, located at 102 Shore Dr. Suite 400 Worcester, MA 01605, is a Registered Representative and Investment Adviser Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

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