Reverse Mortgages

The Reverse Mortgage Loan

You can access the equity in your home while you still live in it without any worries. When you first buy a house most folks are cash poor. All your money goes into your house. As you approach retirement a lot of folks have not had the opportunity to get much beyond this. You did have the savvy to pay your mortgage off and your house has appreciated greatly in value while you have been living there. Life is busy and demanding on your finances. You may not have had the time or the resources to put much money away in retirement investment tools. You have lots of financial equity in it but you also have a lot of emotional equity in it as well. It is your place. Reverse mortgages allow you to access both your financial and keep your emotional equity.

The laws for Reverse Mortgages vary from jurisdiction to jurisdiction. However there are variations on the theme so we will introduce you to the common threads in the rules for administering this tool. Different companies also have a little different way of doing things that make them unique in the marketplace. Make sure you shop thoroughly when considering this option.

What is a Reverse Mortgage?

It is just what is says. It is a mortgage where you take the equity out of your house as opposed to putting equity into your house. That is what you have been doing for 25 or 30 years. Depending on where you are and which company you use you can get your money in a lump sum, in regular payments, in irregular payments where you take only what you need each month, or in combinations of the above. You can take out as much as you like as quickly as you like up to a maximum percentage of the value of the house.

There is a big plus for this product compared to using a line of credit or a home equity loan to access your equity. If you miss payments on the latter 2 products, the lender has the option to foreclose on your property. Because this is a reverse mortgage, there is no reason to go there. You have the peace of mind that you are still secure in your own home until you choose to move.

Qualification

To qualify to do this you need to own your house clear title or at least be in a very high equity position. When you qualify for a reverse mortgage the first portion of the loan goes to pay off the remaining debt against the home to retire any liens against the home. You then start getting paid your monthly installments or your lump sum payment. The second qualification is that you must live in the house. If you sell the house or move to a care home or move to the great care home in the sky the outstanding balance on the mortgage must be paid back by you or your estate. There is a third common qualification and that is an age qualification. The minimum age seems to be 60 years old. In some jurisdictions this may be a little older by 2 to 5 years.

What are the Costs?

It is a mortgage so of course there are interest costs. They are relatively low because they have the security of a paid for home so that is good for you. The interest accrued can be paid, can be paid in full or can be partially paid. Paying the interest in full seems like a good idea to me because you are paying the mortgage company compound interest if you defer the interest payment. Some of these mortgages may insist that you pay at least part of the interest accrued each year.

There are set up fees. Usually the mortgage company will charge a set up fee that may or may not be paid out of the mortgage issued. Out of pocket expenses may include an appraisal and/or legal fees.

You will still be responsible for the maintenance of your home. You need to keep the property taxes paid and your insurance protection up to date. If you are in a condominium or similar situation, it is required that you keep your maintenance fees paid on a current basis.

What happens when we wind down this mortgage?

It is pretty straight forward. When you move out of the house for any of the three reasons identified earlier, all debts owed to the mortgage company must be settled in full. The remaining equity in the house belongs and is paid to the owner of the house or that person’s estate.

Conclusion

When you choose to use a Reverse Mortgage the impact on your budget depends on how you choose to manage the cash you access. You can buy an investment that has a cash flow component that will add to your income each month or each quarter. The interest incurred on the mortgage can be written off as an expense to reduce taxes if that is a factor. Another option is to spend the monthly cash draw from your mortgage. It’s yours. Why not enjoy it? If you want to give it or lend it to the kids to buy a house it really does not affect your cash flow as it is tax free money in most jurisdictions. The only cash draw may be the set up costs and the interest we identified earlier

The impact on your balance sheet is that you will be reducing your net worth over the duration of the mortgage. If the real estate market is appreciating this will be minimized but it is best to assume that the liability you incur with this mortgage will not be offset on the asset side. This is not really a problem because this is what you want to do because you can’t take the money with you when you die.