Q: Regarding your recent column on reverse mortgages: My husband and I thought a reverse mortgage was the greatest thing for us as he was retired and we owned our home. I never really got into it as he did.
Seven months later, he died and I borrowed on the house for funerals (I pre-paid mine also), credit card debt we carried, loans we had, house repairs and what have you. It came to about $70,000. I also thought the reverse mortgage could pay my taxes and insurance.
They called to inform me that I didn’t have enough money for the taxes and insurance. I was devastated to think that my house wasn’t even worth $70,000. It should be worth at least $150,000, even in this economy, and hopefully by the time I die, more than that.
We paid a fortune up front just to obtain this loan. Does this mean the children will be lucky to just pay off the money I borrowed when they sell the house after I die? I never had it explained to me very well and tried to read about it to no avail.
In other words, reverse mortgages are the greatest thing as long as you never use it. You just owe all the interest on what they are charging (talk about sounds too good to be true).
I just want someone to explain what happens to the house when I die or cannot live here anymore. Any help you can give me would be so appreciated and help put my mind at ease.
A: Thanks for your letter, and my condolences on the loss of your dear husband. It’s seems to me that you have no clear idea what a reverse mortgage is, how it works, or what it does (or would do) for your finances. Shame on your mortgage lender for not making sure that you completely understood the program before you signed on the dotted line.
A reverse mortgage allows homeowners over the age of 62 to tap into their home equity. You can either take the money in a lump sum, as a line of credit (which it sounds like your husband opted to do), monthly payments, or a combination of all three.
Reverse mortgages aren’t cheap – but they are cheaper than they used to be. In the story available on my website at ThinkGlink.com/reverse-mortgage, I detail what the expenses are and how much you can typically borrow.
In your case, it sounds as though you had the option to take out the cash as you needed it. That’s a smart move because you don’t start paying interest on the cash until you need it.
Based on how much you were able to get from your reverse mortgage, your house is probably worth about $150,000. Reverse mortgages don’t allow you to borrow up to 100 percent of the value of the home because you need some room to allow for the interest to accrue. When the home is sold, the reverse mortgage is paid off. Anything that’s left over will go to your kids.
The nice thing about a reverse mortgage is that you can never owe more than what the house is worth. So even if you live another 20 years, and the interest accrues to more than the value of the property, your heirs wouldn’t owe anything additional on the loan. The best part, though, is with a reverse mortgage you don’t pay anything back on the loan until the house is sold.
It sounds as though you got a tremendous benefit from the reverse mortgage: You were able to pay off your debts, pay for some needed house repairs, and pay for two funerals. Paying off your debts will save you cash each month, and you don’t have to worry about paying those bills.
While you were able to pay off all of those bills, you still will have to use your own funds to pay off the taxes and insurance on the home. You need to review your reverse mortgage documents to see what is the maximum amount you could borrow. You will probably find that the amount was close to the $70,000 you borrowed. In a reverse mortgage, the maximum amount you can borrow may be around half of the value of the home at the time you take out the loan. If you were to sell your home today for $150,000, you should have enough money to pay off the reverse mortgage while still leaving you with a substantial amount of cash.
I don’t think that reverse mortgages are for everyone, and it is possible that it was not the right choice for you. But it’s what you have, and as long as you live within your means, and don’t run up credit card debt you can’t pay off with your retirement income, you should be fine. In the long run, your reverse mortgage may allow you to stay in your home, and may prove to be a savvy financial move for you.
May 28, 2009