If you’re like most retired people, the single largest asset you have is your home. Since it may be paid for or possibly subject to a small home equity loan, there is significant equity there that could be used for living expenses, including luxuries such as vacations, a new car, or for necessities, such as a new roof, medical expenses, etc.
In any event, there are some people who are dead-set against encumbering their home because they’ve worked hard to pay off their mortgage. They may even have made double payments or paid additional principal on the home mortgage while they were working in order to pay it off sooner. There is something to be said for this, as some people have more security in having their mortgage paid off in retirement. However, a reverse mortgage may be a good option under certain circumstances.
If you’re having a difficult time making your home equity loan payments and need additional funds, a reverse mortgage is an excellent way to obtain additional cash without having to pay it back. In this situation, you shouldn’t worry so much about whether your children will inherit your house, but rather concentrate on your own needs, drawing on your home’s equity if necessary.
For instance, if your home is valued at $225,000 and there is a mortgage outstanding of $50,000 when you die, your children still will receive $175,000. This is probably significantly more than you paid for your home, so your children will receive a windfall based on your investment.
If you want the total amount of the value of your home to be passed onto your children, then consider taking out a life insurance policy on your life that will pay off the mortgage, thus allowing the entire value of the home to pass to your children. If this is your situation, you should consider having your children own the life insurance policy, since if you become institutionalized, the cash value of this policy will be includable in your assets and may have to be withdrawn, or the policy surrendered in order to pay for long-term care expenses.
If your children own the policy, there is a substantial likelihood that it will not be includable in your countable asset picture for Medicaid-type considerations. Even if you or your spouse is not healthy and may not be insurable at standard rates, many policies are sold as second-to-die policies, whereby a husband and wife are insured by one policy that will not pay off until both are deceased. This second-to-die or joint and survivorship policy is an excellent way to provide additional funds for your family to pay off your mortgage and thus receive the full amount of value in your house upon your death.
While each situation is different, you should explore all your options and consider the tax and non-tax implications of a possible reverse mortgage with your financial advisors.
By: Hyman G. Darling, Esquire