Is it the best option?
Reverse Mortgage for Home Maintenance
by Gary Foreman
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I am a widow and I am finding it hard to maintain my home on my fixed income. Can you give me any advice on reverse mortgages?
Lorie H. in Orlando
Lorie isn't alone. The popularity of reverse mortgages is almost certain to increase. The huge group of baby boomers is just starting to retire. And, for many, their largest financial asset is their home.
Let's begin by learning a little about reverse mortgages and then see if one is a good solution for Lorie. A reverse mortgage is similar to a regular mortgage. You still own your home. At the end of the mortgage, the loan balance must be repaid. But you don't get your cash up front to buy a home and then make monthly payments. In a reverse mortgage, payments are made to you during the life of the loan and you only make one payment at the end of the loan.
The amount of cash you can get depends on how old you are and how valuable your home is. If you have an existing mortgage, you'll need to repay it or roll it into the reverse mortgage.
Your loan balance is the sum of any money used to pay off a previous mortgage, any "cash advances" at closing, any periodic payments plus the interest accrued. The loan balance should never be worth more than the value of your home. When you (or your heirs) sell, you'll get the sale proceeds minus the loan balance.
A reverse mortgage doesn't have a set term. It is due when the home is sold or the last surviving borrower dies or moves out of the home. You can also cause the balance to be due if you add an owner to the home's title, rent all or part of it or take on an additional mortgage.
A reverse mortgage offers a variety of pay out options. Lorie could choose a single lump sum up front or regular monthly payments. Best in her case is probably a line of credit that would allow her to take out amounts as she sees fit. Some mortgages will allow you to use more than one pay out option.
There's no requirement on how you use the money from a reverse mortgage. And the FTC points out a real advantage: "reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits."
Lorie will find fixed and variable rate reverse mortgages. There will be fees involved in setting up a reverse mortgage. Some also have monthly fees.
The loan agreement will require Lorie to keep her home insured, properly maintained and current on property taxes. She must continue to live in the home.
Calculator: Should you borrow from your home equity?
Before applying for a reverse mortgage, Lorie is required to meet with a counselor from an independent government-approved housing agency. She shouldn't count on this counselor having her best interests in mind.
Mortgaging your home should be done cautiously. Get competent advice. Reading a few articles is not sufficient. You want your lawyer to look over the mortgage agreement. Peace of mind is important.
The ideal situation for a reverse mortgage is when the senior homeowner needs a regular monthly check to supplement existing income. Even though Lorie could set it up as a line of credit, a reverse mortgage might not be Lorie's best choice. Remember her goal is to pay for periodic home repairs like house painting, or replacing a roof or furnace.
Lorie might be able to find help financing home repairs. The Area Agencies on Aging (AAA) can point her to available help. Contact them at 800-677-1116 or eldercare.gov.
Supplemental Security Income (SSI) should be explored. If she has limited liquid resources, she could be eligible. For more information, call 1-800-772-1213 or visit https://www.ssa.gov/disabilityssi/ssi.html.
One of the most important ingredients for a comfortable retirement is to be debt free when you retire.
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Lorie might be better off taking out a loan against her life insurance policy. At her age, she may have more life insurance than she needs. Borrowing against the policy could free those dollars.
There are also other ways to raise money. Perhaps Lorie has some furniture that's considered collectible or antique. She might prefer to sell some of those things.
And, while she wouldn't want to take in a stranger, inviting a friend to share her home (and the bills) might work out. Not only would there be financial rewards, but it's nice to be able to share daily chores.
A reverse mortgage could solve Lorie's need for help in paying an occasional bill, but she should move cautiously, especially if her home is her only serious asset. Seniors live longer today. And many use home equity to buy into a nursing home that will guarantee care for her lifetime. She would be wise to explore all her options before deciding to consume her home's equity.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
Take the Next Step
- Use this tool to maximize your retirement by determining the best age to take your Social Security benefits. Don't leave thousands on the table by taking Social Security at the wrong time.
- You might want to get a reverse mortgage even if you don't need the money now. Here are 3 strategic uses for a reverse mortgage line of credit.
- No need to worry about a reverse mortgage leaving you homeless if you take these steps to protect yourself.
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