Five Important Things to Consider before getting a Reverse Mortgage
Due to the upfront fees, a reverse mortgage usually works best for you when you continue to reside in your home for a long time. For that reason, one of the most important things to decide is that living in your home for the duration of your senior years is a smart decision.
When planning for the future as you age, you should carefully consider issues such as the safety and comfort of your home. Things like, does your house have steep stairs or slippery surfaces? Does it have good heating and cooling? Consider both the age and size of your home. Is it difficult to keep clean and well maintained? Is your house amenable to changes as your needs change? For example will it be easy and affordable to install grab bars or ramps? Do you live in a neighborhood that feels unsafe when you go out to do shopping or meet family and friends?
As you age, your mobility and needs may change and you may become more reliant on receiving help in your home. You should think about the range of services for seniors available in your area, and whether they are affordable. You may also depend more on family and friends. Are they close by and able to assist you?
A reverse mortgage is going to impact on your heirs because for the duration of the loan the debt will rise and therefore the remaining equity in your home will fall. So if you receive a lot of money from the reverse mortgage, there may be little or nothing left from the value of your home for them. If the loan becomes due and your heirs oversee the repayment, then they will forfeit all of the money you received from the reverse mortgage, and the fees, plus interest. However, it is important to note that a reverse mortgage is non-recourse. This means that the lender only has recourse from the value in your home and can’t get additional payment from your heirs, even if the amount payable is greater than the value of the home.
If your heirs want to keep the home and the balance on the reverse mortgage is more than the home’s value when the loan is due, they only need to pay 95% of the appraised value. If the balance of the loan is less than the value of the home, they can choose to pay the balance and keep the home.
Your heirs may be supportive and encouraging in your decision to obtain a reverse mortgage and remain living in your home. The additional financial resources may also mean that you are less dependent on them. However, even if you don’t discuss the reverse mortgage with your heirs it is a good idea to include a note in your will. A reverse mortgage will have a significant impact on your estate, so depending on your personal and family situation you should think about how you will communicate that to your heirs.
Your Home Equity
Home equity is the difference between the value of your home, as determined by a licensed appraiser and the money you still owe on any mortgages. If you’ve owned your home for a long time, and paid down on the principal, then it is likely to be worth more than you paid for it, and a lot more than what you still owe on it. If your home is a recent purchase, or the house values in your neighbourhood have not been increasing, then you may need to look more closely at how much equity you have in your home and whether it is worth tapping into. A reverse mortgage calculator can be found at www.aarp.org/revmort.
Drawing down on your home equity It can also be an emotional decision. If you have been living in your home for a long time, then it is likely that you will have a strong sentimental attachment to it. On the other hand, a reverse mortgage can help provide the funds to make adjustments and renovations to your home and also pay for stay at home services so that you can continue to enjoy the comfort of living in your home for the remainder of your senior years.
Once you have decided your home is suitable for the remainder of your senior years you should consider your personal finances. You will probably be relying only on your personal income and assets, which includes the equity in your home. These are used to pay your living expenses and any debt you may owe. A reverse mortgage will convert some of your home equity to income and increase the flexibility of your budget. When assessing your budget, you should factor in unknown future costs for medical and home help. You should also budget for home repairs and maintenance, as well as the more predictable expenses of insurance and tax payments. You need to be sure that your income will sufficiently meet your expenses to allow you to remain in your home?
If you have limited income you should check what sort of government assistance is available to you. Check that the extra income from a reverse mortgage won’t risk losing any government benefits that you might be counting on.
If you are living with a health condition that requires assistance from others, or expect that you may need extra assistance as you age, then you should assess your ability to access that assistance in the future. If you can’t manage the home yourself then the proceeds from a reverse mortgage, plus any income you receive, need to be sufficient to get the help you need. If you have Medicaid, then you should find out how the range of services available under that scheme may benefit you in the future.
Careful consideration needs to be given to your current mobility with awareness to any trends that are developing. Are you beginning to become less stable when walking around? Are you starting to forget things? Your ability to stay independent within your budget is an important factor to weigh up when deciding to obtain a reverse mortgage and remain living in your home.
It is also important to understand that if you withdraw against some of your home equity right now, then less will be available in your later years. If you anticipate that your needs will increase, then you may consider delaying a reverse mortgage, or starting with small payments to supplement your current income and leaving the bulk of the balance for future needs.