Is a Reverse Mortgage Right for You?

July 5, 2009

Reverse mortgages have become a popular option for seniors who would like to reap some of the benefits of the equity they have built up in their homes. However, it’s important to be aware of both the advantages and drawbacks to these loans. The Virginia Society of CPAs explains how they work and the issues to consider.

The basics

A reverse mortgage is simply a different kind of home loan, one that is generally only available to people 62 and older. Instead of borrowing to buy a house, the homeowner gets a loan based on his or her equity in a home he or she already owns. Say, for example, that you own a home worth $200,000 with no outstanding mortgage on it. You are nearing retirement and would like to add some extra income to your retirement savings. The bank offers you a reverse mortgage of $75,000. You can choose to receive the money in payments spread out over time — for example, monthly — or in a lump sum payment. You can also set up the loan as a line of credit that you can tap into as needed. You do not have to make any repayments until the home is sold or until you die or move, even if you outlive the loan term. And you do not have to move out of the home when the loan term ends, either. When the home is sold or you move out of it, you or your heirs must repay the $75,000 — with interest and fees — out of the sale proceeds.

Qualifying for a reverse mortgage

In addition to being 62 or older, to qualify for a reverse mortgage, you must own the home outright and live in it as your principal residence. If you have an existing mortgage on the home, it should be a relatively small one that you will pay off with some of the reverse mortgage proceeds. Your income is not a factor in the loan decision because you will be receiving payments, not making them. 

Consider the disadvantages

A reverse mortgage can be a great way to free up equity in your home to use during retirement. However, they are not always advisable. Reverse mortgages are probably a better deal if you are in your 70s or older rather than in your 60s. That’s because the bank will likely be willing to give you a bigger loan, as decisions are made based on your life expectancy. In addition, if you expect to downsize, move closer to family or transition to an assisted-living or similar facility sometime in the future, remember that you will have to pay the loan amount back to the bank when you sell your home. That means you will have less money to spend on your next residence.

Diminished inheritance

One of the biggest drawbacks of reverse mortgages is their impact on the inheritance you leave. In our example above, after the $75,000 loan amount — plus interest and fees — is deducted from the value of a $200,000 home, there will be less money left for your heirs, a key issue to consider before taking this type of loan.

Read the fine print

It’s also important to ask questions about the responsibilities facing you down the road. Find out about the interest rate and fees on the loan, and how much they will amount to when the mortgage is paid off. Especially with home values dropping during the last year, you don’t want to learn that the total amount you owe later is more than the value of your home.

Consult your CPA

Reverse mortgages are generally made available under the U.S. Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage Program. You can learn more by calling (800) 569-4287 or going to the HUD website at www.hud.gov. 
 
And be sure to contact your local CPA with any questions on important financial issues. He or she has the expertise to provide the advice you need.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has 8,300 members who work in public accounting, industry, government and education. The VSCPA is celebrating its Centennial anniversary this year — 100 years of an organized CPA profession and a strong organization uniting and representing CPAs across the Commonwealth. Visit www.vscpa.com/Centennial to learn more about the VSCPA’s Centennial Celebration. For general information, please visit the Press Room on the VSCPA website at www.vscpa.com, e-mail vscpa@vscpa.com or call (804) 612-9424. To search for a CPA in your geographic region, visit www.FinancialFitness.org and click on “Find a CPA.”

© 2009 American Institute of Certified Public Accountants