Reverse mortgages: A personal look
The Savage Truth
I have long been a fan of reverse mortgages — if they are done in the right circumstances and for the right reasons. Regular readers of this column know I always put my money where my mouth is. And in the case of reverse mortgages, I want to give you a very personal example.
About 15 years ago, I helped my father get a reverse mortgage. When he passed away a few months ago, at age 95, he was still living there — and had only in recent years tapped into his long-term care insurance for daily helpers. I helped him pay his insurance, property taxes and the occasional special assessment along the way.
My dad worried about how the balance of the reverse mortgage “loan” was building up, including the interest that was charged on the money withdrawn. By the time of his death, it had accumulated to far more than it was worth in the market. I had regularly reminded him that they could never force him to move out. I urged him to not worry, live longer — and beat the odds. He certainly did.
Now the condo is being turned over to the lender. The family had agreed at the start that we wanted Dad to live there in dignity as long as possible, and we wouldn’t worry about losing the property in the end if he outlived his equity. This is the way a reverse mortgage should work.
And that’s why I want to remind readers about how reverse mortgages can allow them to stay in the homes they love — if it makes sense in their own situation. Here are five things to consider:
The basic requirements: RMS are available to those age 62 and older who are using the home as a primary residence. RMS work better if there is no mortgage, or only a small remaining balance on an existing mortgage. You will be charged interest on the amount withdrawn, and there are fees to originate the loan. So it’s only worth doing if you plan to live in the house for at least five years.
The amount of the loan: The amount of money you can receive — either in a lump sum or in a monthly check — is determined by your age (or joint ages of spouses who co-own the home), by the current level of interest rates and, of course, by the current market value of your home, less any current mortgage balance. To get a rough idea of how much money you could receive, use the calculator at Reversemortgage.org.
Tax consequences: You are taking out the equity you paid into your home with all those years of mortgage payments. So the money you withdraw is tax-free.
Length of stay in the home: You can’t “run out” of equity or be kicked out. The banks that provide RMS use actuarial tables to figure out how much they can lend you from your equity. If you live longer than projected, they will keep paying you every month (if you selected the monthly payment option). If you sell the house or are required to move into a nursing facility, the house will be sold and proceeds used to repay the loan. Any excess belongs to you or your heirs. Spouses have special protections. At your death, your heirs will have the ability to repay the loan and keep the property.
Your responsibilities: Your name remains on the title to the home, and you must pay the property taxes, insurance, condo or community assessments, and maintain the property. So plan carefully before taking out a RM to make sure you will have adequate income to remain in your home.
Taking out a reverse mortgage is a big step. That’s why the government requires counseling by an independent, trained and Hud-approved third-party agency.
A reverse mortgage is worth considering. I know that first hand. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at Terrysavage.com.