REVERSE MORTGAGE

People often ask me for advice about reverse mortgages.  They hear that with a reverse mortgage the bank pays you instead of your paying the bank, and that sounds good to them.  Here is the advice I give them:  if you want your children or other loved ones to inherit your home, do not get a reverse mortgage.  If you don’t mind having your home go to the bank rather than to your children when you die, then it might be ok to get a reverse mortgage.

The name “reverse mortgage” is not accurate. A more accurate name would be “anaconda mortgage,” because like the anaconda snake, a reverse mortgage will usually swallow up your home, so that it cannot be left to your children as an inheritance.

A reverse mortgage requires that all the owners of the home be at least 62 years old. You can choose to receive a lump sum loan, a loan that comes to you in monthly installments, a line of credit, or a combination of the three.  The bank does not “pay” you. You are borrowing money, the same as with any other mortgage. The difference is that you do not have to make any payments to the bank until you are no longer living in the home. The bank charges large fees when you first get the reverse mortgage, and charges you interest and fees every month. Since you are not making payments, the bank is earning compound interest. The interest and fees you are not paying are added to your loan every month, the interest amount increases every month, and you owe the bank more and more every month.  It is amazing how quickly the balance owing grows to a large amount.

If you die or move out of your home, the entire loan balance must be paid.  If a husband and wife have a reverse mortgage together, when both of them die or move out of the house, the entire balance must be paid. Many times, the loan balance is so large that the children cannot afford to pay it off. The bank then forecloses on the mortgage. Often, the bank ends up owning the home. The bank can then sell the home at a profit, and keep all the profit, in addition to the interest and fees that were charged. The children get nothing.

Also, a reverse mortgage makes it impossible to protect your home from nursing home costs. One of the best ways to protect your home from nursing home costs is to transfer it to an irrevocable trust for your children, and to keep a life estate in the property. A reverse mortgage does not allow you to use this asset protection technique. Also, with a reverse mortgage, if you have to go into a nursing home, the bank will demand that you pay the entire balance of the loan.  Since you will probably not be able to pay off the reverse mortgage, you either have to sell the home, or the bank will foreclose.  When your home is sold, the reverse mortgage could eat up all of the money from the sale.  If it doesn’t, then the bank will take everything that is owed them, and you will end up with some cash.  That cash will disqualify your from Medicaid (unlike a life estate in the home, which would have been an exempt asset).

If you absolutely need more income to survive, before getting a reverse mortgage, see if your children or other loved ones would be willing to buy a remainder interest in your home, with your keeping the right to live in the home. You could charge a low interest rate, much lower than the bank would, and have your children pay a monthly amount, without any down payment. If they could afford to do that, you could have your increased income, and they could end up with the home at a low cost.

© OKURA & ASSOCIATES, 2011