The Skinny on Reverse Mortgages
February 15th, 2016 by beasleyferber
We have been asked many times whether a reverse mortgage is a good thing. Like anything else in life, it has advantages and disadvantages. Just what is a reverse mortgage? With a regular mortgage, you make your payments each month, and the principal shrinks. At the end of the mortgage term, the principal is down to zero, and the mortgage is paid off. A reverse mortgage is exactly the opposite. You make no payments on the loan. Sort of like a credit card, interest continues to accrue on the unpaid balance, the interest is added to the principal, and then there is interest on the interest. The loan is paid off when the house is sold, either during your life if you want to move, or, more commonly, after your death. The loan company is paid, and if there is any money left over, that goes to your heirs. There are three types of reverse mortgages, (1) where you take out the money in a lump sum (2) where you are paid monthly, sort of like an annuity, and (3) where you just have a line of credit, and take money out as you need it.
The advantage of a reverse mortgage is that it can be used to help seniors stay in their homes if they otherwise couldn’t afford to do so, or it can help them stretch their assets. As reported in a recent article in Time Magazine, a creative use of an equity line reverse mortgage is to tap into it when the stock market is down, and thereby letting your investments have time to recover. The Time article has another interesting statistic: If you fail to apply for the reverse mortgage until all your other funds are exhausted, you have a 30% probability of running out of money. If, on the other hand, you apply for the reverse mortgage before your other assets are exhausted, you have only a 10% probability of running out of money.
Whether or not a reverse mortgage is right for you is a matter that you should consider very carefully, in consultation with an accountant or other trusted financial advisor. In the right case, though, it can prove very useful.