|
Pinnacle Resource Center Primer On Reverse Mortgages Reverse mortgages are a fairly new concept that allows people of retirement age to use the equity in their home to create additional cash flow for other expenses. Let's look at how a reverse mortgage could work: Bob and Myra are 64 years of age and own a $200,000 property. Of the property value, $150,000 is equity and $50,000 is debt. Every month, Bob and Myra are making a payment to a mortgage company for the remaining balance on their mortgage. If they executed a reverse mortgage, a financial institution would assume the $50,000 in debt - meaning Bob and Myra no longer have a mortgage payment - and agree to pay them a set fee every month for life based on the equity value in the house. Bob and Myra's increase in monthly cash flow would equal the mortgage payment, which they are no longer paying, plus the monthly fee they receive for the reverse mortgage. Bob and Myra could elect a lump sum payment option as well; however, most people choose the monthly fee. Bob and Myra would not pay state or federal taxes on the additional income (the fees) from the reverse mortgage. The reverse mortgage stays in effect until the last surviving borrower sells the home, vacates the property, or dies. The financial institution assumes ownership of the property if the last surviving borrower vacates or dies. While it sounds like a good deal, reverse mortgages are not for everyone. In my experience, about one in eight people who inquire about them actually go through with the process after learning all the details. Reverse mortgages are best for people who need to supplement their monthly income. This need can arise from an unexpected event in life such as increased medical care or a lack of savings for retirement. To qualify for a reverse mortgage, you must be at least 62 years of age and own the home where you live. I consider several other important factors that I review with clients. First, the client should have substantial equity in the home. This increases the value of the reverse mortgage. Second, the client should plan to stay in the home for some time. Reverse mortgages have closing costs that are on average twice as much as conventional loans. It can take three to four years to begin recouping the financial benefits of a reverse mortgage depending upon the amount of equity in the home. The U.S. Dept. of Housing and Urban Development requires anyone who is serious about a reverse mortgage to attend a session with a HUD counselor to discuss the specifics. Mike Stapp is a mortgage advisor at Pinnacle Financial Partners. He can be reached at (615) 744-3783 or by e-mail at mike.stapp@pnfp.com. |
Comments? Please contact us.
