Over the past few months, several of my clients have asked me whether it is appropriate or when is the best time to obtain a reverse mortgage. Normally, we suggest to clients that they do not obtain a reverse mortgage unless they are running low on cash or need more funds for care at home.
In prior years, it was fairly expensive to get a reverse mortgage, as the fees were considerably higher than those of a typical mortgage or home equity loan. A reverse mortgage, also known as a home equity conversion mortgage, becomes a good solution for our clients who may wish to cash in on the equity in their house. This is sometimes referred to as a person who is house rich but cash poor.
If you need additional funds for home care or possibly to pay the costs of living in your house, including heat, taxes, insurance, etc., then a reverse mortgage is a valuable alternative, since it does not need to be paid back during your lifetime. One of the problems, however, is that once the limit is reached on the withdrawal amount of the loan, further funds are not available, and you may have to either sell the house or attempt to obtain a new reverse mortgage if the value of the home has increased sufficiently enough.
A reverse mortgage is similar to a regular mortgage, except that the bank is advancing funds to you either in a lump sum, on an annuity basis, or possibly merely on a credit basis, which means that you can withdraw funds as desired up to the allowed maximum. The loan does not have to be paid back unless you die or live out of the house for at least 6 months, possibly in a long term care facility. As long as at least one spouse lives in the home, no payments need to be made, nor does the house have to be sold.
In most cases, your assets and income are not considered for a loan to be approved or denied, as the bank is merely funding it based on the equity in your house. Also, in most cases, the funds received from a reverse mortgage do not adversely affect your eligibility for any governmental benefits, since it is not construed to be income, but rather, merely the withdraw of equity from your home.
Many of my clients have already transferred their houses to their children and reserved a life estate. In these cases, provided that you (the homeowner) are at least 62 years or older, many banks will consider providing you with a reverse mortgage, but your children will have to sign off on the mortgage also. If this is a concern for your kids, they could deed the house back to you, but this may trigger an additional 5-year waiting period, in the event that you wish to re-transfer the property to your children in order to protect the asset from long term care expenses.
Prior to obtaining a reverse mortgage, the federal government requires that you be counseled as to its pros and cons. This counseling is free, and you may obtain information by contacting the AARP Reverse Mortgage Education Program at 1-800-209-8085. You may also wish to contact an elder law attorney who is also skilled in advising client as to the benefits and detriments of obtaining a reverse mortgage.
Hyman G. Darling, Esq.
Photo credit: James.Thompson under Creative Commons license