To review what we said in part 1, reverse mortgages are loans that let you use the value of your home as collateral. If you are 62 or older, you can use them to get tax-free money by borrowing against the value of your home. Probably a good idea if you're an older person who needs money for medical care, to keep up your standard of living, or for some other reason.
So, what are some of Reverse Mortgages' drawbacks?
- They are even harder to understand than usual...
To review what we said in part 1, reverse mortgages are loans that let you use the value of your home as collateral. If you are 62 or older, you can use them to get tax-free money by borrowing against the value of your home. Probably a good idea if you're an older person who needs money for medical care, to keep up your standard of living, or for some other reason.
So, what are some of Reverse Mortgages' drawbacks?
They are even more complicated than regular mortgages, and the results of the different choices may not always be clear.
Compared to other options, they may be on the pricey side.
Even though you don't have to pay taxes on the money you get, it could affect your ability to get "need-based" public assistance like Medicare, Supplemental Social Security Income (SSI), and Medicaid/MediCal.
- It lowers the amount of equity you have in the property, which could be bad for your heirs.
Even people who work in real estate and the law don't always know much about this source of money. (See what they've done before you take their advice.)
What kinds are there, in general?
- Mortgages backed by the Federal Housing Administration (FHA) (HECM).
- Lender-insured.
- No insurance.
Each type has different limits on how much you can borrow, how you'll get the money, and what you can spend it on, like interest, closing costs, and other fees.
Before getting this loan, here are some things to think about:
What amount of money do you need?
Is there another way you can get the money you need?
-Will a Reverse Mortgage make you or your partner ineligible for government benefits now or in the future?
-Can I get this type of Mortgage?
-How much money can you get?
-How much will it cost you in fees and interest to borrow this money, even if you don't have any out-of-pocket costs?
-To pay off the loan, will you have to sell your house before you die?
-If you die and your spouse is still living in the house, will he or she have to leave or pay it all off?
-Will you have to pay back the loan if you go to a nursing home or long-term care facility?
-What will you or your heirs have when the loan is paid off?
-Are there any fees for paying off the loan early?
-What are your responsibilities, such as taking care of the property, paying property taxes, and getting insurance?
Before making a choice, there are seven important things to do:
- Find out if your mortgage affects whether or not you can get "need-based" public assistance benefits.
- Compare prices to find the best deal. It could change how much money you get right away and over time, how the money is paid out, how much interest and other fees you pay, and so on.
- Think about whether you really need it. Another type of loan might be a cheaper way to get the money you need.
- You might want to include your family in the decision-making process, especially your grown children. It's a good idea to make sure that all of your heirs agree that this type of mortgage arrangement is fine. Don't forget that you might be cutting their inheritance.
- Does getting a reverse mortgage make you happy after you have thought about all the facts? If so, that's a good sign. If you aren't sure, it's best to look at all of your options again.
- Figure out how long you plan to live there. For the first two to three years, these loans are pretty expensive, so you might want to look into other options first.
- Talk to a Reverse Mortgage counsellor who is approved by HUD before you apply. Most of the time, this service of giving information is free. A counsellor can help you figure out what kind of financial help you need and which kind is best.
This is the end of the week. In Part 3, which will come out next week, we'll answer some of the most common questions about reverse mortgages.
