You’ve seen the TV ads. A well-known, trust-worthy celebrity telling you how they too were suspicious of reverse mortgages until they
got paid looked into them. Does the lender really pay you? Do you still own your home? Tax free and no impact on your Social Security? YoFreeSamples wanted to know!
It’s Still a Loan
A reverse mortgage is basically a home equity loan. How much you get is based on your age, the value and location of your home plus the expected appreciation of your home over time. And like any other loan, there are closing costs and annual fees that you must pay.
Types of Reverse Mortgages
Home Equity Conversion Mortgages (HECM) are federally insured and offered by the Department of Housing and Urban Development. HECMs are generally more costly and even more complicated than other types of reverse mortgages – and they’re not the ones being advertised on TV. If you’re interested in these, you can read the gory details here.
States and localities may offer what are called “single purpose” reverse mortgages. These are smaller amounts – usually given as a lump sum – for things like home repairs or to pay taxes. And they’re not the ones they’re talking about on TV either. Those are private loans where, instead of getting a lump sum, the lender doles out the money in monthly installments. It’s how they can claim the lender “pays” you!
You Still Own Your Home, But…
If your name is on the home’s title, you own your own home. But whether you’re carrying a mortgage, or any other loans where you used your home as collateral (and that includes a reverse mortgage) there are liens – financial claims – on the title. So, if there is a balance due on any of your loans, when you go to sell your home, you have to pay these off.
With a reverse mortgage, the lien is enforced when you vacate the home. If you’re selling, as with other loans, you need to pay back the money the lender loaned you. If you vacate because of death, your estate must pay it back.
What About Interest?
Mortgages and home equity loans generally offer a fixed interest amount – say, 4% annually for the length of the loan. When you make payments on these types of loans, the bank wants its interest as soon as possible, so most of your early payments go to paying that off. As time goes on, you pay down the principle – the amount you actually borrowed.
With reverse mortgages, since you’re not making any payments, the lender just tacks on the interest and other costs each year to the principle amount. So, let’s say you got a reverse mortgage for $50,000. You vacate the house after 10 years. Besides the $50,0000, you also have to pay back the interest and fees they added over the years.
But…It’s Tax Free Money!
I can’t tell you how much it irks me that they say this. As is the case with any loan, the money you receive isn’t considered income so it’s not taxable and it won’t affect any Social Security benefits. But speaking of taxes, unlike regular mortgages, you can’t deduct your interest payments on your annual tax return. The interest is only deductible when the reverse mortgage is terminated.
What About My Spouse or Children?
If you’re married and both of you sign the loan agreement, if one dies before the other, the loan payments continue. If only one spouse signs, if they die first, there may be a clause to allow the surviving spouse to stay in the house but the loan is over. Plus, the estate still has to pay off the reverse mortgage. That means that if there isn’t enough money to pay back the loan, the house has to be sold. So, less money – and possibly a move – for the surviving spouse.
To be blunt, any child waiting for a pay day upon their parents’ death is not being realistic. Start saving now because if your parents do have a reverse mortgage, that inheritance you were expecting will be greatly diminished.
Is There Anything Good About Reverse Mortgages?
A reverse mortgage may be an option worth considering if you don’t have other sources of money in your retirement. But we can’t stress enough that you need to know what you’re getting into. These are complicated and relatively costly loans, something you’d never know if you by listening to those TV talking points.