Estate Planning and Elder Law Attorneys are often asked by clients whether a reverse mortgage is the right choice for them. The answer of course is that it depends on the circumstances. Are you over the age of 62? Do you have substantial equity in your home but limited cash resources to pay bills? Do you want to remain in your home indefinitely? Then a Reverse Mortgage may be for you.
Here’s how it works:
Let’s assume that you have substantial health related expenditures, but you don’t have the cash to pay for them. Rather than borrow the money in traditional ways – such as a home equity loan – you decide on a reverse mortgage. By choosing this option monthly payments of principal and interest that would otherwise be required with a traditional mortgage, are eliminated. Instead you receive a sum of money from the lender based on the value of your home, your age and the current interest rate. When you die or sell the property, the loan is repaid from the proceeds of the sale or your estate.
The lower the interest rate and the older the borrower, the more you can receive. The money can be obtained either in a lump sum, a line of credit – that can be drawn down at the borrower’s option – or a series of regular payments. The amount received can be used for any purpose.
Sounds great right?
Yes, but there are several drawbacks to consider. First, closing costs associated with reverse mortgages may be as much as twice those of traditional mortgages. Although these fees can be financed by the mortgage itself, the amount of cash you receive will be reduced accordingly.
In addition, Reverse mortgage payments may affect your ability to receive government benefits, such as Medicaid. Although generally not counted as income when spent in the month received, should you receive a lump sum payment, any unspent balance could put a borrower over the allowable asset limits for Medicaid.
The are other considerations as well. For example, after your gone, the home will need to be sold to pay off the reverse mortgage and you may have nothing left over for your children or heirs.
Whatever your thoughts about Reverse Mortgages, don’t proceed until you consult a professional – either your estate planning attorney or another trusted advisor. Like many other complicated legal and financial decisions, it doesn’t pay to go it alone.