While elder law and estate planning are often used interchangeably, there are important differences between…
As we age, our financial resources and priorities begin to shift; we may no longer be receiving a bi-weekly paycheck, but we also may no longer have dependent children. However, a lot of stress can result from living on a limited income in the shadow of increased costs associated with healthcare and estate planning.
There are a number of financial tools and arrangements that can help you finance your retirement years, including pensions, 401(k)s, and various trusts and insurance programs. Another option exists that is not as widely known-reverse mortgages. This option may be right for you if you own the home you live in and are looking for some extra cash.
A reverse mortgage lets you borrow against the equity in your home without having to repay the loan while you still live in the house. You can get the money in a lump sum, in monthly cash payments for life, or by drawing on a line of credit, or you can choose a combination of these options. The amount you can borrow and the sizes of the loan installments are based on several factors, including: your age, the value of the home and of your equity in it, the interest rate, and the kind of loan you select. Reverse mortgages can be costly, but the relative costs lessen over time, and you will never owe more than the value of your home.
Most reverse mortgages place no restrictions on how you use the money. The loan usually does not have to be repaid until you sell your home, move, or die. In years past, there were loans that had to be repaid at the end of a specified number of years. Very few, if any, of these types of loans still exist. Some lenders combine a reverse mortgage with an annuity that allows you to receive payments under the annuity even after you sell your home and move. However, there can be complicated tax implications resulting from such an annuity; make sure you understand how an annuity would impact your tax obligations and estate planning before agreeing to such an arrangement.
If you enter into a reverse mortgage, you will be required to repay the money you have borrowed plus the accrued interest and fees when you sell your home or move, or at the end of the term. The house can be sold to repay the loan, or the funds can be collected some other way (for example, out of your savings). The lender is not permitted to collect more than the appraised value of the home at the time the loan is repaid, even if the loan exceeds that amount. Therefore, you will never end up owing more than the current value of the home, which can provide some important peace of mind.
You will never end up owing more than the current value of the home, which can provide some important peace of mind.
The most widely available reverse-mortgage product is the federally insured Home Equity Conversion Mortgage (HECM). Under this program, the Federal Housing Authority (FHA) provides insurance for reverse mortgages acquired through private financial institutions. Another reverse-mortgage program is the Home Keeper Mortgage, which is backed by Fannie Mae. Over the years, a few private companies have started to offer their own reverse-mortgage products. These tend to be more costly than the HECM or the Home Equity Keeper Mortgage because the lender must charge customers more in order to self- insure against potential losses. Federal law requires all reverse-mortgage lenders to inform you, before making the loan, of the total amount you will owe throughout the course of the loan. This allows you to compare the costs of different mortgages.
Your eligibility for a reverse mortgage depends on the specific loan you apply for, but most programs have rules similar to those of the HECM program. Generally, you and anyone who is listed on the deed must:
Be at least 62 years old; andOwn the property free and clear, except for liens or mortgages that can be paid off with proceeds from the loan.In addition, the property must be:The borrower’s primary residence (so, a vacation home won’t work); andA single-family home or in a one- to four- unit building. (Some condominiums are eligible depending on the program.)
If you are considering a reverse mortgage, it is important to think through how it might impact your estate planning. Reverse mortgages allow you to spend your home equity while you are alive. This can be a useful way to get more cash to spend now; however, it may also result in your using up all of your equity and not having any left to pass along to your heirs. It is important to talk to the attorney who helped you craft your estate plan to determine if a certain reverse mortgage option is best for your needs. There can also be complicated tax implications connected with certain reverse mortgage options that your lawyer or tax advisor can help you understand.