Question: My husband and I thought a reverse mortgage was the greatest thing for us, as he was retired and we owned our home. Seven months later, he died and I borrowed on the house for funerals (I prepaid 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 upfront 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?
Answer: 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 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 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 that 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 for two funerals. Paying off your debts will save you cash each month, and you don’t have to worry about paying those bills.
But you still will have to use your own funds to pay the taxes and insurance on the home. You should review your reverse-mortgage documents. You will probably find that the maximum amount you could borrow was close to $70,000. 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.
Reverse mortgages aren’t 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 prove to be a savvy financial move.
Comment by Carol: It appears the primary reason for the homeowner’s confusion was the property value. She assumed she was getting a reverse mortgage for 100% of the value of the home. Reverse mortgages never work in this manner because it would not be financially feasible for the lender.
Credit for this article attributed to The Washington Post Real Estate Bag, June 6, 2009. Question submitted by a reader.
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