If you are over the age of 62 and experiencing financial stress, then you may be tempted to consider a reverse mortgage. For very few, these mortgages may be a good idea.
Consider the case of Mary who talked to a reverse mortgage provider. They offered her a line of credit she could use in whatever way she desired. Secondly, they offered her flexibility on paying back the mortgage and even said that she could choose to never pay the money back as long as she lived in the home.
She was told that she would not have to pay taxes on the money that she received and that if she paid back the mortgage, then she may be able to subtract that money from her taxes.
They even sat on her sofa and told her that she would never owe more than the value of the home. Mary was smart, however, and talked to her nephew, a lawyer, before she agreed to sign any paperwork. What he told his amazed aunt Mary may amaze you as well.
Seniors still pay property taxes, insurance, and property upkeep
If you are a senior in a situation similar to Mary’s, then realize that if you get a reverse mortgage, you are still responsible for the taxes on the house. The average U.S. homeowner spends $2,127 on property taxes which is more than many seniors can afford. Furthermore, the senior is also responsible for property insurance.
The average U.S. homeowner’s policy costs $952 each year. The senior is also responsible for keeping the house in good repair. Financial experts suggest that over the course of 10 years, the cost of home maintenance averages about $3,000 a year.
Multiply those costs over a ten year period and you may need to come up with $60,790. Suddenly, the amount of money that the provider is offering you may not look so good. In fact, many people find that they are just putting off the inevitable decision that they must move elsewhere.
Limited control over the property
While the financial burden can seem large with these mortgages, you must also consider the fact that you have limited control over who can live in the property and what happens to the property if you need to go into a nursing home or assisted care facility.
If you let someone move into your home, then you have to notify the mortgage company ahead of time. In most cases, the company will not allow another individual to move in unless the mortgage is repaid in full. This includes cases where you may need physical help. If you stay more than a year in a nursing home or other care facility, then you must give up your rights to your home.
House can not be left as an inheritance
Many seniors plan on leaving their homes to their children as part of their inheritance. When they take out reverse mortgages, the estate must pay the mortgage or lose the home. Often little time is given to these individuals to make a decision and hardly any time is given for them to come up with the funds during an already stressful time in their lives. In some cases, mortgage companies have even forced a surviving spouse to move out of the home when the borrowing spouse dies.
Seniors fail to consider other options
Many seniors hear the advertisements for these mortgages and fail to consider other options that may provide the needed short-term cash but have fewer associated risks. One such option is a home equity line of credit from a traditional financial institution.
The advantage of these loans is that the senior is working with someone that they may already know and trust. Reverse mortgages often have complicated terms, and there is usually no local representative available to help the senior understand the terms. Compared to other loans, these mortgages often have high fees. Seniors may never realize it, however, because these rates and fees are usually buried deep in the paperwork.
Seniors cannot get government health help
What the seniors need for government help is often impacted by these mortgages. For example, when a senior applies for Medicaid, the total amount of liquid assets is used to determine if the senior qualifies. The money received from these loans counts as a liquid asset.
Losing money on investment
If the senior decides to take out all the available money at one time, then the money may not be growing as fast as it could otherwise. In fact, seniors often find that they are losing money because the interest rate that is accumulating on loan is higher than the interest rate that they are receiving on the money’s investment.
After Mary’s nephew had got done explaining all the downside of these mortgages, Mary knew that a reverse mortgage was not for her. She thanked her nephew profusely and decided to come up with a new plan of action.