The COVID-19 pandemic has taken a global toll on the markets and the retirement accounts of many seniors. Seniors who are homeowners, however, can access to cash for living expenses through a reverse mortgage. The reverse mortgage is a financial tool that has helped many seniors who are over 62 years old.
In my previous article, Part 1 of this topic, I provided an overview of how seniors can qualify for a reverse mortgage. In today’s article, I will discuss in more detail the benefits and disadvantages of a reverse mortgage.
Ideas for using a reverse mortgage:
• Provides income when the client is down to their home equity as their last source of retirement income.
• Provides income while a retirement portfolio continues to grow.
• Supplements income from an under-performing retirement portfolio.
• Supplements income while waiting longer to receive Social Security benefits.
• Can help with the purchase of a downsized home during retirement and have no payments. The proceeds of the reverse mortgage can be distributed in lump sum, equal monthly payments, or as a line of credit with a variable interest rate.
• Proceeds from a lump sum disbursement (secured by the personal residence) can be used to purchase an investment property.
If a qualifying homeowner chooses, the homeowner can use a reverse mortgage to purchase a duplex, triplex or a 4 unit. The homeowner needs to live in one of the units as their personal residence, then they can rent out the units they don’t live in for income.
Benefits of a reverse mortgage:
• Loan proceeds are not considered income and are not taxable. Could make the difference as to whether or not a senior can stay in their home by enabling the senior to receive monthly income rather than make payments.
• The payments made to the senior are not taxable.
• If there is an existing loan, it can be paid off from the initial proceeds of the reverse mortgage.
• The formula for the reverse mortgage prevents the mortgage from exceeding the value of the home. When the senior passes away, the estate inherits the home and any equity after the reverse mortgage is paid off.
• There are no restrictions on what the proceeds of the reverse mortgage can beused for.
• A reverse mortgage is a non-recourse loan.
Disadvantages of a reverse mortgage:
• The costs of getting a reverse mortgage are usually higher than a normal mortgage. There is a requirement for mortgage insurance, which adds to the upfront costs.
• Government assistance programs, such as Medicaid or Supplemental Security Income, might be affected if too much is withdrawn in one month. The local administrator for these programs should be contacted for individual details.
• Reverse mortgages are complex, and the senior should get tax and legal advice if not fully understood. It is a good idea to use a loan officer who is local and specializes in reverse mortgages.
• The reverse mortgage is a negative amortizing loan, which means the balance increases over time.
Be sure to contact a loan officer who is a Certified Reverse Mortgage Professional (CRMP) to see if this type financial tool would work for you.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.