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What is a reverse mortgage?

A Reverse mortgage is a mortgage lien placed on your house to secure a promissory note for money a lending company lends you, which is no different than a regular mortgage. The difference is that with a Reverse mortgage there are no required monthly payments. Your obligations when you have a reverse mortgage are to pay your taxes and insurance and maintain the upkeep on the property. You can voluntarily make monthly or sporadic payments, but there is no obligation to do so. The actual loan product may vary between companies. You can have the entire loan as an equity line or withdraw 100% of the money the bank is willing to lend you at one time; or have a portion taken out in a lump sum and a portion as an equity line; or have a specific amount deposited into your checking account until the loan is exhausted; or a combination of two or all three of these options. The amount the company will lend you will be determined by the equity in your property and your age. All of the owners and borrowers must be over the age of 65 and there are no income or credit requirements. The sole qualifier for a reverse mortgage is your equity in your house. You can take out a reverse mortgage and if you never draw funds from it, you never owe any money. Interest will accrue only on any outstanding balance just like any other loan but you still are not obligated to make payments. The interest is just added to the total debt. Should you wish to sell your house, you can as long as you pay off the reverse mortgage at closing. Should you use up the full amount of what the company was willing to lend you, you can continue to live in your home so long as you continue paying your taxes and insurance and maintaining the property. Upon your vacating the property and not expecting to return to live in the property within a year, you will be required to sell the property. If there is any remaining equity in the property after paying off the reverse mortgage, it is still your money. If you owe more than the house is worth, then you can transfer the house to the company and you will no longer owe them anything. The maximum they can recover from you regardless of how much you owe is your house. The same occurs upon your passing. Your survivors will have up to one year to sell the property if there is remaining equity, otherwise, the company will take the house and your obligation is then satisfied.

Do I need a reverse mortgage?

Normally we only recommend a reverse mortgage as a last resort. Usually it works well when someone owns their property out right, but it can be used to refinance existing debt. As an example, Mom and Dad are both over 65 and own their home outright. They have social security income and maybe even a pension coming in. They either have just enough money to live off of, but no reserves for emergencies or, on average are short each month to meet their bills. In this situation it could be wise for Mom and Dad to take out a reverse mortgage. Their house is a non liquid asset just sitting there and Mom and Dad really don’t want to move. They take out a reverse mortgage and set it up so $200.00+/-per month is deposited into their checking account. Now they have enough money to pay their regular expenses. If an emergency comes up they can usually get an additional advance as needed or increase their monthly deposit as needed. These products tend to be flexible.

The downside to these products are the costs up front tend to be higher than a regular loan and, again depending on the value of your house and your age, the amount the company will lend you is not going to be anywhere near what a regular loan would be. The reason is the additional equity in the property is used as a reserve to protect the accrual of interest since you are not making any monthly payments. Prior to taking out a reverse mortgage, you should consult with your attorney and review your Estate Plan along with it to make sure it makes sense in your situation. Reverse Mortgages are not for everyone.

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