Keep It Simple
By Gary Molatore
In this article, I will explain how reverse mortgages are different than traditional mortgages, who can qualify for one, whether or not this type of mortgage is appropriate for you and discuss some creative uses of reverse mortgages.
Reverse mortgages are almost the exact opposite of a traditional mortgage. As you know, a traditional mortgage starts out at a certain amount, say, $200,000 and slowly gets paid off in a certain number of years, typically 15 or 30 years, and ends with a zero balance. Each month you pay money into a traditional mortgage and the payments are part principle and part interest. By comparison, a reverse mortgage starts with a zero balance and slowly gets larger as you are paid from the equity in your home. The most important thing to remember is you still own your home when you get a reverse mortgage. A reverse mortgage is simply a different type of loan which is secured by the value of your home. The unique aspect of reverse mortgages is the payment structure. You don't make monthly payments to the mortgage company, the mortgage company makes payments to you. This is the "reverse" part. By contrast, if you take out a home equity loan, you must repay the loan monthly. Not so with a reverse mortgage.
The payments you receive are based upon your age, the value of your home and current interest rates. You can continue receiving the payments until a triggering event occurs. If you sell the home, move out of the home or die, the loan balance is due. At that point, you or your heirs can pay the loan off, refinance the home or sell the home to pay the loan amount.
Here's some important information to know about reverse mortgages. The ultimate balance of the loan is the total of all the payments you receive from the mortgage company plus interest. But, the loan balance payable upon a triggering event can never be larger than the value of your home. Even if real estate values crash and your home decreases in value, you will never have to pay back more than the value of your home. But if the reverse mortgage balance is less than the value of your home, your heirs will receive the remaining equity. Normally, your heirs are allowed up to 6 months to repay the loan, sell the home or refinance the property after you're gone.
Payments you receive from the reverse mortgage company are non-taxable and won't affect your social security payments or increase the taxation of your social security. You and your spouse, if you both own the home, must be at least age 62 to qualify for a reverse mortgage. There are no health questions and no income levels to qualify.
For a reverse mortgage to make sense, there should be equity in your home in excess of any mortgages, as any existing mortgages will be paid off from the proceeds of the reverse mortgage, and the remaining equity will determine the monthly payments you receive. If you have insufficient equity to receive payments from your home, a reverse mortgage might still make sense by paying off your existing mortgage. This way you can stop making mortgage payments!
Only your primary residence qualifies for a reverse mortgage. Vacation homes, certain rental properties and mobile homes not on a permanent foundation usually don't qualify. The reverse mortgage amount is limited within each county regardless of the value of your home. Butte county is currently capped at $275,500. By comparison, Sacramento is capped at $362,790 . So even if your home is worth, say, $750,000, the amount of the reverse mortgage you can qualify for is limited. Most reverse mortgage companies can prepare computer illustrations, free of charge, showing you the particulars of your situation.
Now for the fun stuff. Let's say you have a $2,500 monthly mortgage payment and find it difficult to pay your bills each month and live the life style you desire. If you get a reverse mortgage which pays you only $1,500 per month, that would be like having an extra $4,000 each month! Since you don't have to pay your $2,500 mortgage payment anymore, AND you are receiving an extra $1,500 cash each month, you're $4,000 richer! Would that change your attitude?
Here's another idea. You can use the proceeds from a reverse mortgage to pay your health care costs after retirement, between ages 62 and 65 until you qualify for Medicare. At age 65 you can use the proceeds to pay your Medicare supplement premiums. You could also use the reverse mortgage proceeds to invest in a long-term care policy to protect your estate. A reverse mortgage in combination with a long-term care policy lets you use your home equity to protect your house, and everything else you own. We'll talk about long-term care in another issue.
And if you're wealthy, but "cash poor," you can use the proceeds of a reverse mortgage to fund a gifting program to your children or grandchildren to set up a college 529 Plan. By doing this you'll be accomplishing more than you might realize. You'll be reducing your estate and possibly reducing your estate tax liability. The estate tax is in a state of flux, and may, or may not, be repealed. Regardless, a little estate planning never hurts. I'll save some of my ideas in that area for a future article.
Lastly, there is a lot of information about reverse mortgages on the internet. Use Google and search "Reverse Mortgages." Educate yourself on the internet, but remember, your local economy thrives when you shop locally. There are very competitive companies offering reverse mortgages locally. Many of them advertise in this publication. Make our advertisers happy. Call them first! See ads on pages 11 and 26.