If you watch any TV shows geared towards older Americans, you have probably been bombarded by ads for reverse mortgages. Celebrities pitch the idea of cashing in on the equity in your home as if it’s a foolproof way of supplementing your retirement income and savings. After all, if Tom Selleck thinks it’s a great idea, it must be—right? Sorry, Magnum, but reverse mortgages aren’t for everyone. Our Estate Planning legal team explains how they work and reveals the significant downsides in this blog.
What Is a Reverse Mortgage?
First, the basics. A reverse mortgage is a loan. Homeowners with considerable equity in their homes who are at least 62 years old can borrow against the value and get a fixed monthly payment, a lump sum, or a line of credit. It is the “reverse” of a traditional mortgage because instead of making loan payments to a bank, the bank makes payments to you. But we started out saying that it is a loan, so when does it come due? When you sell the home or upon your death—whichever comes first, the entire loan balance must be paid. Lenders are required by federal law to structure the transaction so that the loan amount doesn’t exceed the home’s value, so there is a certain amount of protection built into the program.
Sounds Good—So, What’s the Problem?
Just like a traditional mortgage, there are closing costs and interest rates to consider when seeking a reverse mortgage. While getting much-needed cash out of your home and being able to continue living in it sounds like a win-win, the downsides include the following:
- Closing costs are high. If you have ever refinanced your home, you know that it’s important to weigh the closing costs against the potential savings of a lower interest rate. The same is true for a reverse mortgage. Closing costs are about double those for conventional mortgages, so you will get less out of your house than you have paid in.
- You could lose government benefits. In some cases, your reverse mortgage payments could be counted as income and affect your eligibility for any need-based government program, including Medicaid. If you are counting on Medicaid in case you need a nursing home one day, a reverse mortgage could jeopardize your plan.
- Your house loses equity and can’t be left to your heirs. If you had hoped to leave your home to your children after you are gone, a reverse mortgage could eliminate that possibility. If you end up taking more out of the home than your heirs can pay back without selling the home, they will not be able to inherit.
These factors should be discussed with a financial advisor before you jump into a reverse mortgage. There are situations—such as opening a line of credit as a bridge to get you to retirement age—that could make sense for you.
An Estate Planning Attorney Can Help You Make a Better Plan
If you are tempted by a Tom Selleck commercial during a classic Law & Order rerun, don’t make any decisions until you thoroughly research your options. You might be worried about funding your retirement and having enough money to pay for a nursing home if you or your spouse needs one someday. However, there are steps you can take with a Medicaid Planning attorney to ensure that you will be able to get the quality care you might need down the road. The Elder Law team at Ross & Shoalmire is very familiar with the pros and cons of reverse mortgages and also has other options to consider.
Are You Looking for an Elder Law Attorney in Texarkana, TX?If you are looking for advice about reverse mortgages and paying for a nursing home, you need to speak with an experienced Elder Law attorney as soon as possible. Contact us online or call our Texarkana office directly at 903.223.5653. We also have offices in Tyler, Paris, Longview as well as Magnolia, AR!