Home Selling Series – Is a Reverse Mortgage worth considering?

I have been doing some investigating for a client considering using a reverse mortgage in lieu of selling. This article from Houiselogic presents the simplest and straight forward analysis of a reverse mortgage.

Article From HouseLogic.com

By: Dona DeZube
Published: June 29, 2011

Big lenders in the reverse mortgage business — Wells Fargo this month and Bank of America earlier this year — have pulled out of the market and won’t issue any new reverse mortgages. But MetLife and several smaller companies plan to stay in the market, so you won’t have issues finding a reverse mortgage if you want one.

But should you take out a reverse mortgage? Only get one if you:

  • Have equity in your home and no way of paying the bills other than selling your home and living on the proceeds (because reverse mortgages have steep upfront fees).
  • Can pay the property taxes and home owner’s insurance bills from now until you die with or without the money you’re getting from the reverse mortgage. More on that later.

With a reverse mortgage, if you’re 62 or older, you get to cash out your equity (the bank keeps some as an insurance policy on the “loan”) and keep the house. The bank pays you the value of your house either in a lump sum, in fixed monthly payments, or gives you a line of equity, all of which are based on formulas taking into account your home’s appraised value, current interest rates, and the youngest applicant’s age.

Because you don’t pay back a reverse mortgage, you don’t have to prove you have a future income the way you do with a regular mortgage – the reverse mortgage is your future income.

If you opt for the lump sum and spend it all, the bank can’t force you to move out. You get to stay until you die, or until you’re out of the house for a year, presumably in a rest home.

The catch: If you don’t pay your property taxes, the bank would have to pay them for you or foreclose before the tax man can sell your home to cover the taxes you owe.

If you don’t pay your insurance premiums, the bank can put an insurance policy on your house and then ask you to pay for it. But if you can’t pay the bill, the bank has to get permission from the U.S. Department of Housing and Urban Development, which backs reverse mortgages, to foreclose on you. And, so far, HUD hasn’t allowed any reverse mortgage foreclosures.

By the way, Wells Fargo has implied it’s leaving the market because HUD isn’t moving fast enough to come up with a financial assessment that would allow banks to turn down reverse mortgage borrowers who aren’t qualified and also solve the tax and insurance issues.

Are you a fit for a reverse mortgage?

Before you sign up for a reverse mortgage, do some budget projections to make sure you’ll be able to continue to pay your property taxes and insurance bills in the future.

If you know how much your home owners insurance and property taxes have risen in your town each year over the past 10 years, you can calculate how much they’ll be in 30 years. If, like me, you just know they always go up, but you’re not sure how much, you can use a general inflation calculator (http://www.halfhill.com/inflation.html) to estimate your costs out to 2070.

A reverse mortgage can be a blessing if your retirement income just isn’t going as far as your retirement costs. Getting to cash out your equity and not having to move truly is having your birthday cake and eating it, too, as long as you have enough cash to make sure you don’t outlive the party.

Would you take out a reverse mortgage to pay for home costs during your retirement? Let us know what you think!

About gvenice

I have over 25 years of electrical engineering and business management experience. I previously owned and managed a multi million dollar engineering firm. My work took me all over the globe, managing the construction of manufacturing plants where I built a reputation of providing superior service, getting projects done on time and within or under budget. My dedication to the fine details and logical approach to accomplishing tasks provide a huge benefit to my Real Estate clients. After selling my business and retiring to this area, I found a new passion in the Real Estate business and I bring to this business the same level of professional skill and conduct that has made mr successful in the past. My global exposure and extensive travel are also an asset when dealing with a customer base that is located worldwide. An avid boater, I have a thourough understanding of the waterways of East Tennessee and the intricacies involved in dealing with the TVA and the Army Corps of Engineers.
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