Two weeks ago, we began comparing popular debt-based ways of releasing equity in the home. On the first post of this three-part miniseries, we talked about HELOCs, how they work and what consumers should know before getting a home equity line of credit. In our second post last week, we focused on Home Equity Loans – HELs – using a similar approach to create awareness by highlighting pros and cons. Today, we are going to conclude with a discussion around reverse mortgages, maybe the most controversial form of debt used to get equity from the home.
There are three kinds of reverse mortgages available to consumers: single purpose reverse mortgages, offered by some governmental agencies and selected non-profits; proprietary reverse mortgages, which are private loans; and federally-insured reverse mortgages, famously known as Home Equity Conversion Mortgages (HECMs). Once you determine which type you want, the reverse mortgage company determines the maximum amount you can borrow in a single sum or through a guaranteed line of credit. Although each one has its differences, all reverse mortgages are loans with deferred interest that is compounded over time. So, while no payment is currently made, the interest accrues each month and compounds – meaning that you must pay interest on the principal AND interest on the interest.
In most cases, the homeowner doesn’t have to pay back the money for as long as they remain in the home. Upon death, the sale of the home, or relocation, you, your surviving spouse, or your heirs will repay the loan and the deferred interest. Often, that implies selling the asset to get money to repay the amount you owe. Practically, through this kind of loan, you borrow against the equity in your home but keep the title and keep living in it. However, as you can see from this brief description, the money you draw from your home equity eats away at the remaining home equity, potentially leaving you with no equity to share in your estate. Money you take from a reverse mortgage usually is not taxable, and it shouldn’t affect your Social Security benefits either. When the last borrower dies, sells the home, or stops living in it as primary residence, the loan must be repaid.
Before getting a reverse mortgage, there are some serious considerations to be made. First off, you cannot qualify for a reverse mortgage unless you are 62 or older. As mentioned above, since the interest is added each month to the balance, you end up owing more money as time goes by. That means the amount you owe grows as the interest on your loan adds up over time. Interest rates for most reverse mortgages are variable, except for HECMs that can offer fixed rates, but dramatically reduce the amount you can borrow. Interest on reverse mortgages aren’t currently deductible but may be deductible when the loan is paid off; there are fees and other costs that you are responsible for – besides the origination fee, the homeowner pays a servicing fee throughout the life of the loan; you are still responsible for other expenses associated with the home (property taxes, insurance, utilities, maintenance, etc.); if you become delinquent on any of these payments, the lender might require you to repay your loan and could foreclose on you.
Additionally, there is an emotional as well as financial burden that you may leave behind when you get a reverse mortgage. After you pass away, if your spouse outlives you and if you signed the loan paperwork and your spouse didn’t, in certain situations he/she may be able to continue to live in the home. However, your spouse will have to continue to maintain the property, pay taxes and insurance, and will stop getting money from the lender, since he/she wasn’t part of the loan agreement. Also, if you like the idea of leaving the home to your heirs, they’ll have to pay off the loan balance or refinance first, which could be a stressful situation.
Clearly, reverse mortgages are complex solutions that have many side effects. So much so that to get a reverse mortgage you must go through an independent educational program that reinforces the terms and conditions of the reverse mortgage. For certain elderly homeowners, this may be a suitable option but the implications in the medium/long-run be can be quite undesirable. We hope by now that you have realized the positive and negative aspects of each debt-based solution aimed at getting equity out of your home. If you have done so, you can now answer the original question: why should you share? Accessing equity in your home through our equity sharing product is a clean, non-debt solution that will bring you liquidity, freedom and a clear path to achieve your financial objectives, without the burden and obstacles posed by heavy debt. Thanks for your time! See you here next week.