What You Should Know About Reverse Mortgages, Part 1

 Posted on October 26,2017 in Estate Planning

If you watch television at certain times of the day, you are likely to see occasional advertisements for reverse mortgages. These ads often run in similar timeslots as commercials for arthritis medication and electric scooters. It is clear that they are intended to reach a certain demographic—namely, seniors who are starting to consider the reality that they will not live forever. As with most television pitches, it understandable that the audience would be skeptical, but a reverse mortgage may be an option for certain individuals and families.

Reverse Mortgages Defined

Most people understand that a standard mortgage is a financial arrangement in which a lender provides a borrower with money to buy real estate, including a home. The property itself is the collateral used to secure the loan. The borrower makes regular installment payments until the amount borrowed and any accumulated interest is repaid.

In a reverse mortgage, the process is—as the name implies—reversed. Instead of making monthly payments, the borrower receives payments from a lender based on a certain percentage of the value of his or her home. Reverse mortgage payments can be structured as monthly installments, a lump sum, or a line of available credit. When the borrower dies or moves out of the home, the lender will usually sell the home to recover the amount borrowed unless the borrower’s heirs make other arrangements to repay the debt.

Benefits of a Reverse Mortgage

To qualify for a reverse mortgage, the borrower must be at least 62 years old and have a reasonable amount of equity in his or her home. A borrower may qualify for a reverse mortgage even if he or she is still paying on a traditional mortgage

Most people who apply for reverse mortgages do so because they are “cash-poor” and “house-rich.” In other words, they live in nice, possibly paid-off homes but do not have money to pay bills or living expenses. The money available in a reverse mortgage may provide a supplement to retirement or Social Security income, allowing borrowers to live more comfortably.

Reverse mortgage repayment is also limited to the value of the home in question. For example, if you take out a reverse mortgage at age 62 and receive monthly payments for 30 years that total more than your home is worth, your debt will still be settled if and when the lender sells the home, regardless of the sale price.

Estate Planning Guidance

In an upcoming post, we will look at some of the possible drawbacks to a reverse mortgage. Meanwhile, if you have questions about the estate planning process, contact an experienced Lombard estate planning attorney. Call 630-426-0196 for a confidential consultation at A. Traub & Associates today.

Sources:

http://www.investopedia.com/terms/r/reversemortgage.asp

https://www.kiplinger.com/article/retirement/T021-C000-S004-what-heirs-need-to-know-about-reverse-mortgages.html

http://www.thinkadvisor.com/2015/12/07/reverse-mortgages-in-an-estate-plan-7-pros-and-con