This is a guest post from my friend Dennis Miller
Two of the top subjects that my Money Forever readers have asked us to cover are annuities, specifically how to pick the right one and covered in the November issue with a companion “how-to” special report (click here for how to get your copy), and reverse mortgages. My guess they’re seeing all those TV ads featuring Henry Winkler and Robert Wagner and wondering if it’s right for them.
Quite simply a reverse mortgage is where you give the bank a mortgage on your home based on your current equity. In return, the mortgage company agrees to pay you a certain amount every month for some period of time: until you die, move out, or celebrate your 100th birthday (the age when they’re generally capped). For a reverse mortgage to be a good investment, you have to outlive your expected mortality and stay in your home.
Reverse mortgages have many individualized, variable components. For our purposes, we are sticking to the basic concepts. If you think you are a good candidate, make sure to consult a licensed, professional HUD counselor to help tailor the product to your needs.
If you’re considering a reverse mortgage, there are several financial issues you should review first. To help you consider your options, I’ve put together the Money Forever Reverse Mortgage Checklist:
1. Can you afford the upkeep and maintenance on your home? And will you still be able to afford it down the road?
Inflation could easily double the cost of your real-estate taxes, lawn maintenance, water bill, and energy costs over the next decade. Then there’s the cost of homeowner’s insurance, flood insurance if you live in a flood zone, and whatever other insurance you might need for your state’s natural disaster of choice. You may have enough money that this won’t be a problem. If you have any doubt, perhaps downsizing to something smaller should be your first step before considering a reverse mortgage.
2. If you’re committed to staying in your home, are you stressed out each month as you pay your bills?
If most of your net worth is tied up in your home, under the right conditions, tapping into that equity with a reverse mortgage can make sense. The HUD counselors can help you review your options.
3. How much income, other than the reverse mortgage, can you count on?
We have friends who are both retired from the government and receive nice pensions. They are quick to point out that when one of them dies, that pension stops. The survivor will not only lose their spouse, but also the income from the pension. For long-term planning, they factor in the surviving spouse’s ability to handle the finances without that income. It’s a good example of how to be realistic about your future income.
4. How much equity do we have in our current home?
A recent HUD survey indicates that 67% of the folks who went through counseling still had a conventional mortgage on their home. It’s a common misconception that the bank pays off your current mortgage and sends you a monthly check. That is incorrect. The existing mortgage on your home is effectively held by the new lender.
The amount you receive every month from a reverse mortgage is based on your net equity in your home. While you could sell and downsize, that wouldn’t change your equity that much. You will just be in a smaller home (hopefully one that’s less costly to maintain).
If a homeowner has a current mortgage with less than ten years remaining, I suggest asking your bank for an amortization schedule. Look at it to see what percentage of your mortgage payment goes to principal and what percentage goes to interest. Perhaps you could pay more toward your principal and considerably reduce the number of years left on your mortgage.
If you can pay your home off in 2-3 years, thereby eliminating your house payment, do you still need a reverse mortgage? Perhaps that reduction in monthly payments is all you need. Remember, the longer you wait to take out a reverse mortgage, the higher the monthly check.
5. How old is the youngest spouse? What plans, if any, are in place for the surviving spouse?
While researching reverse mortgages, I came across more than one horror story about a surviving spouse getting thrown out of the house when the first one died. The reverse mortgage was in the husband’s name only because he was the oldest. That meant a higher monthly payment, but it also brought an eviction notice for his wife when he passed away.
When asking for quotes, you should always have both names on the reverse mortgage with the understanding that the monthly payments will be lower.
6. How is your health?
Your health has a direct effect on how long you can expect to stay in your home. With the availability of home health care, you may be able to live at home for the rest of your life. If you have misgivings about your long-term health, it might be a good idea to consult your family doctor. If you’re like me and degenerative diseases like Parkinson’s or Alzheimer’s run in your family, it’s important to factor in the possibility that you won’t be able to live in your home forever.
There are a lot of factors to keep in mind when considering a reverse mortgage. In summary, you might be a candidate if:
•You are in the home you can afford to live in until you die or must move due to aging.
•You are in the home you want to and can easily live in, until you die or must move due to aging.
•You can conveniently access necessities from your current home like shopping, health care, and social activities.
•You do not foresee any future issues like isolation from family and friends or safety concerns.
If you’ve been through the checklist and think you’re a good candidate, then it’s time to review the risks involved, and there are plenty of them.
In the December issue of Money Forever we shared with readers the inherent risks of reverse mortgages as well as additional considerations before you get involved with any type of reverse mortgage product.
We also have detailed research on a health care REIT (real estate investment trust) that’s paying a 4%+ dividend yield and has recently announced its intention to raise that. Find out more about Money Forever and get the Reverse Mortgages issue today. Click here.