Q: I recently saw a TV commercial advertising reverse mortgages. I have owned my home for many years and my mortgage is almost paid off. Is a reverse mortgage a good idea to help me cover my living costs?
A: If you are at least 62 years old and have significant equity in your home, a reverse mortgage might make sense. However, reverse mortgages can be tricky. Here are some things you need to know before deciding if a reverse mortgage is right for you.
A reverse mortgage has three distinct benefits, especially for older homeowners who desire to stay in their homes. First, within limits, a reverse mortgage allows you to borrow against the equity in your home without requiring you to ever make a mortgage payment. Instead, the interest that accrues on the amount you borrow is added to the mortgage balance. When you move away or die, you or your heirs will be required to pay the outstanding loan balance just like you would with a traditional mortgage.
Second, the lender cannot reduce your credit limit—even if the value of your home declines and you owe more than the home is worth. On the other hand, as the value of your home increases, your mortgage limit may increase also.
Finally, as long as you hold to the terms of the loan agreement, your reverse mortgage will not come due until after you move from the home or die. You can stay in the house as long as you wish and the lender can never foreclose.
As compelling as these benefits may seem, it is vital that you understand the fine print on your mortgage agreement. If you are not careful and you inadvertently violate the terms of the agreement, the lender will likely call the loan. If you are unable to repay the mortgage from other sources or to secure another loan, you could lose your home. Here are some of the circumstances that could cause your reverse mortgage to come due early.
1. Living elsewhere for more than six consecutive months for whatever reason. (The limit is 12 months if you are away for medical reasons.)
2. Changing the beneficiaries on your trust, if the home is owned in a revocable living trust.
3. Adding a new owner to the home’s title.
4. Renting out the home, in part or in its entirety.
5. Failure to stay current with property taxes and insurance.
6. Taking out new debt against the home.
7. Failure to maintain the home and make necessary repairs.
8. Changing your home’s zoning classification.
9. Declaration of bankruptcy.
10. Lying or misrepresenting material information on your loan application.
Whether or not these possible pitfalls should discourage you from doing a reverse mortgage depends on your unique circumstances. As part of the application process, you will be required to meet with a HUD-approved housing counselor. Your counselor will help you fully understand how reverse mortgages work and should be able to highlight any potential dangers. In addition, your financial advisor should be able to help you understand if a reverse mortgage is the best fit for your particular situation.
Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.