You’ve likely heard the good and the bad about reverse mortgages. But what’s real? Before you consider this strategy, consider a few key components.
There’s no doubt you’ve seen TV advertisements telling seniors that their lives could improve if they use reverse mortgages to harvest the equity in their homes. They go on to tell you that you can free up money to take an expensive trip, remodel your home or just have fun. It sounds appealing — but is it worth it?
What is a reverse mortgage?As the name implies, a reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, you borrow a sum of money to purchase a home and then pay off the debt over time.
With a reverse mortgage, you receive loan proceeds (as a lump-sum payout, an annuity, a line of credit or a combination of all three) but make no payments as long as you reside in the property. The loan, with any accrued interest, comes due when you move out or pass away. To qualify for a reverse mortgage you need to be 62 or older, own your residence and generally have significant equity in your home.
Unfortunately, reports of abuse regarding aggressive and predatory sales practices are common. Here are a few items to analyze if you’re thinking about a reverse mortgage:
• Determine if a reverse mortgage is logical for your situation. Evaluate alternatives. Conventional solutions such as a home-equity loan might be a better answer.
• Consider the financial ramifications. Reverse mortgages can be expensive. Upfront fees are significant. If you stay in your home just a few years, the effective interest rate can be very high.
• Be wary of bundled sales pitches. Commission-driven salesmen can push life insurance or various annuity products along with a reverse mortgage. You could end up with products you don’t need.
If you are considering a reverse mortgage, call us. We can help you determine potential tax issues, plus other alternatives.