We get the pluses and minuses from a reverse mortgage expert
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by Gary Foreman
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You're finding it hard to live on Social Security alone. Your only valuable asset is your home and you don't want to move. Friends tell you to check out a reverse mortgage, but you don't know much about reverse mortgages and aren't sure who to ask.
To help us understand how reverse mortgages work and their advantages and disadvantages, we reached out to Kirk Kinder. Mr. Kinder owns a fee-only financial planning firm called Picket Fence Financial. Mr. Kinder says that the firm is "dedicated to saving folks from Wall Street."
Q: For those that aren't familiar with reverse mortgages, can you explain how they work?
Mr. Kinder: A reverse mortgage or HECM (Home Equity Conversion Mortgage) is a specially designed loan that allows homeowners age 62 and over to access a portion of their homes equity.
Q: An obvious reason for getting a reverse mortgage is to get cash out of your home without moving. Are there other good reasons for getting a reverse mortgage?
Mr. Kinder: The borrowers can use those proceeds for practically any purpose (supplement cash flow, pay down credit card debt or other debts, hire a home care agency so they can stay at home, or use the line of credit option as a safety net/emergency fund). Some planners even recommend using the equity to invest in stocks, bonds, and other investments although I would strongly discourage that. If you find that you are in a cash crunch or want to use your home equity as opposed to your investment portfolio for cash flow, a reverse mortgage can make sense.
Q: What happens if you want or need to move out of your house (say to an assisted living facility) but don't want to sell your home? What happens to the reverse mortgage?
Mr. Kinder: If you have a reverse mortgage and need to move out of your home, you may need to sell your home in order to repay the reverse mortgage. However, if the loan balance is less than your home is worth when you sell it, then the difference is yours to keep. It depends on your situation. Most reverse mortgages today are insured by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) program. A HECM reverse mortgage loan must be paid off completely when the last surviving borrower permanently moves out of the home. Any situation in which you've lived someplace else, including a nursing home or assisted living, for more than 12 months counts as a "permanent move." A stay in a nursing home or assisted living for less than 12 months does not affect your reverse mortgage or your home; you can keep your home during your stay and come back to it afterwards.
Q: Some fear that they could be forced to leave their home. That's not true. But what are some of the real risks of a reverse mortgage?
Mr. Kinder: At the end of the loan, your home is typically sold and the proceeds are used to pay off the mortgage. Because of the large upfront costs and the compounding interest, a significant portion of your equity will be used to pay the interest and fees. That means you'll be significantly reducing any inheritance you hope to leave to your surviving spouse, family, or charity.
Another risk is the possibility that your spouse will be forced to sell your home or deal with foreclosure proceedings if she or he didn't take out the reverse mortgage with you. At the very least, you'll want to speak to any family member living in the home who wasn't a co-borrower to make sure they have a plan once you die. Something else to watch for is when reverse mortgage lenders refuse to let the borrowers change the terms of their loans by, say, lowering the interest rate or adding borrowers to the loan to ensure they wouldn't be evicted when the original borrower dies.
Q: Many boomers are saddled with debts like credit cards, auto loans, and even student loans. Does it make sense to get a reverse mortgage to pay off those loans?
Mr. Kinder: It certainly could if the boomer is looking to stay in their home permanently. It could improve their cash flow position considerably since they don't have to repay the reverse mortgage while living.
Q: What happens when the home's market value goes up or down? How does that affect the borrower?
Mr. Kinder: The good news here is the reverse mortgage is a non-recourse loan, which means the borrower (or the heir) doesn't have to repay more than the sale price of the home. Therefore, if the real estate market tanks like it did in many areas in the 2006-2010 period, the borrower won't have to pony up additional funds.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
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