Is A Reverse Mortgage Right For You?

Let’s start this financial column by noting that this week, I have been very amused to be watching a robin’s nest with four young birds and a very busy Mom, who are all living on one of my windowsills.

Yes, this is financially oriented. The baby robins, I noted, were featherless with their eyes closed for about 48 hours. Now, less than a week later, they are so enormous they have almost outgrown their home. What comes next? That’s right. The feathers are coming in and very soon it will be an empty next – before you can even say whippoorwill.

At that point, the hard-working Mom will have a nest that is far too big for her needs and she will consider her options. Maybe, if his is happening to you in your home, you should consider a reverse mortgage.

If you sell your house, you will have to move and buy another place or rent somewhere. If you buy, don’t forget all those hidden costs that you encountered when you first moved into your present home. That would be variable tax rates (except they almost always go up), variable interest rates if you have an adjustable loan and utility bills that will vary from season to season.

With a reverse mortgage, however, you get to remain in your home, even after your children have flown off, leaving you to tend the empty nest.

In so many words, a reverse mortgage is that odd financial promise that is so generous it seems to be a prank. But it is a serious financial service or product that allows elderly homeowners to stay in their homes and even to cover some of their ongoing bills.

For many elderly homeowners, using a reverse mortgage when thinking about retirement is a fundamental part of their retirement planning. They have discussed this with their bankers and their children and decided that staying in their home was the best option for the early part of their “empty nest” years.

How do you qualify? According to the Consumer Financial Protection Bureau, which began after the last major U.S. recession, the qualifications are simple. You need to be at least 62 years old. The home must be your primary residence. And you must have paid off most or all of your traditional mortgage.

With any federally-backed lender, you are also mandated to see a financial counselor to review the implications of a reverse mortgage before you sign off on one.

It works this way: With a mortgage, month after month, you pay the lender for your mortgage loan. Most of the money at first goes to interest on the loan, but some of every payment also goes towards the principle of the mortgage loan and with any principle payment made, you gain equity or ownership of that much of your home.

Let’s say you borrow $100,000 for your home – just to use simple numbers. The interest on the loan is paid first, so your first payments involve paying very little principle. But over time the ratio of interest and principle in your payments begins to switch. Towards the end of the loan, most of your monthly payments to toward principle with smaller amounts going to interest.

Over time, you build up the equity in your home – the portion you actually own. Traditionally, however, the only way to get your hands on that equity is to sell the house. Then, you could have the money, but you would have to move.

A reverse mortgage is the bank’s way of saying they understand you have a lot of money tied up in the house as equity and would, perhaps, like to spend some of that equity before you move.

With a reverse mortgage – hold onto your hat – the bank starts paying you every month, while you stay put.

The downside is simple to understand. With a mortgage payment, you own more of the house every month as you pay off the principle on the loan. With a reverse mortgage, every month the bank pays you, your equity in the house shrinks. Eventually, when you do sell the house, you now own less of it, while the bank owns a larger share.

For many older homeowners, the implications are that they will have money to spend on expenses now, but they will have less of a fortune to put in their will for their children and grandchildren. So, a reverse mortgage is not a gift, except that sometimes remaining in the home means having a better quality of life. So, a reverse mortgage is not a gift, but it has very significant benefits.