There’s a lot of buzz about reverse mortgages, including commercials featuring celebrity spokespeople painting a rosy picture of an influx of cash and no monthly payments for retirees and senior citizens. So, is it the right choice for you, or is it too good to be true? As a Certified Financial Planner, I help clients answer questions like these every day. Here’s the scoop on reverse mortgages and why the team at CWM largely views them as a loan of last resort.
What is a reverse mortgage?
Like a traditional mortgage, a reverse mortgage is a loan that uses your home as collateral while you live there and keeps the property in your name. The key difference between a traditional mortgage and a reverse mortgage is how the loan is paid off. A reverse mortgage is repaid in full when you no longer live in the home; eliminating monthly mortgage payments. You will still be required to pay for things like property taxes and homeowner’s insurance as long as you own the home. Additionally, in Washington state, eligibility for a reverse mortgage is dependent upon two things: The youngest person on the title must be at least 62 and you must have at least 50% equity in the house.
When might you use a reverse mortgage?
There are two obvious times when you might use a reverse mortgage:
First, when you don’t have a choice – when the only way you can make ends meet is if you eliminate the monthly mortgage payment. However, in that event one should generally first consider selling and downsizing, selling and relocating to a less expensive area, or selling and renting.
Second, and ironically, when you don’t need it – when your home is paid off and you have the means and resources to maintain your lifestyle in retirement, a reverse mortgage could be a strategy for legacy assets to pass on to heirs. If you find yourself in this position, working with a financial advisor to explore this strategy could be beneficial.
What are the potential downsides?
In exchange for the convenience of a loan with no monthly payments, reverse mortgages tend to be expensive – both in terms of interest rates and additional fees. They can also put you at risk of foreclosure in certain circumstances, such as failure to maintain the property and non-payment of property taxes or homeowners’ insurance premiums. Other potential downsides include:
– High costs, which can drain your home equity.
– Potential loss of the family home if you cannot repay the loan upon your death.
– Impact on Medicaid benefits, as lump sum reverse mortgage payments could increase your liquid assets, potentially making you ineligible to receive Medicaid.
What are some benefits of a reverse mortgage?
Reverse mortgages are costly, but with that expense comes potential benefits:
– A reverse mortgage allows you to supplement your income without making monthly payments.
– Instead of leaving your home, a reverse mortgage allows you to age in place.
– The IRS doesn’t treat funds received from a reverse mortgage as income.
– No debt passed to heirs should your home sell at a loss.
– It may be easier to qualify for than a standard mortgage loan.
Should you pursue a reverse mortgage?
Ultimately, the decision to take out a reverse mortgage should be discussed with your financial advisor so that a holistic view of your financial situation can be considered. A reverse mortgage is a tool in the financial toolkit, and it may be worth exploring scenarios and strategies as you navigate finances to assess the risks and benefits.
Want to learn more about other mortgage strategies? Read about Buying Down Mortgage Rates!
We’re here to help
If you or a loved one is at retirement age and navigating a complicated estate, we are here to help. Comprehensive Wealth Management is a boutique family-owned firm where personalized white-glove service is our top priority. Interested in learning more? Check out our latest articles, videos, and resources for valuable insights into today’s financial landscape.
Brian J. Lockett, CFP®
Vice President and Lead Advisor
Comprehensive Wealth Management
3500 188th St. S.W., Suite 102
Lynnwood, WA 98037
Phone: 425-778-6160
800-268-2440
Comprehensive Wealth Management, LLC (CWM) is an SEC registered Investment Advisor and Pacific Northwest wealth management firm that partners with clients to articulate and help achieve their financial goals as prudently as possible. Our high-touch, client-focused investment planning and implementation makes us the first call for executives, business owners, and other thoughtful investors to help strengthen their financial health holistically and intentionally, managing risk while pursuing long-term gains.
This material is not intended to replace the advice of a licensed mortgage broker. Consultation with the appropriate professional should be done before any financial commitments regarding the issues to the situation are made.
All investments involve the risk of potential investment losses as well as the potential for investment gains. Past performance is no guarantee of future results. This communication is informational only and is not a solicitation for investment advice.
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