Reverse mortgages are becoming more popular now that the housing market is down, people are living longer, and health care costs are increasing rapidly. However, much caution needs to be used when considering them.
Valerie RumboughThe basic structure is as follows: A homeowner contracts with a financial institution, such as a bank, that does reverse mortgages. The institution charges an upfront fee, sometimes as much as 5 percent, then charges a premium each month. The institution then makes payments to the homeowner, which is added to the amount eventually due to the institution. The institution is paid back when the owner either moves or dies, and the home is sold.
The homeowner is still responsible for maintenance, upkeep, property taxes, and insurance. Typically the institution will not pay more than a certain percentage of the property value, which is around 80 percent. This can be a real lifesaver for someone who needs cash for living expenses, has a big house they can’t sell, and a small to zero mortgage. It is not a good idea for most everyone else, mainly because it is not cost effective.
If you are considering one, be sure to read the fine print that the institution gives you. Don’t fall for market pitches of those that try to sell you other products to “enhance” the funds you get from the reverse mortgage. In addition, even though HUD has capped the amount institutions can charge for closing costs, some will also charge you other fees. Make sure you understand all the fees associated with the contract. Since you are paying interest on the amount you have received from the institution, it is better to receive monthly payments from the bank rather than a lump sum.
One more thing: Once the institution has paid the maximum, that is it – no more payments. A better alternative for someone to consider if they need cash is a home equity line of credit. They can borrow and pay back as needed, with lower fees.
– Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at 800-723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.