Due to the current economic downturn, many elders have experienced difficulty in paying their monthly expenses. In fact, some studies suggest that more than half of all older households have insufficient income to meet their basic living expenses. As a result, many baby boomers are withdrawing the equity from their home through the use of a reverse mortgage.
Unlike the traditional mortgage, a reverse mortgage is a process where a home owner is able to withdraw a portion of the equity from their home, but still not have to make monthly payments. Instead, the lender makes an initial distribution against the line of credit and then the lender pays the monthly interest through additional advances on the line of credit. The borrower is not required to pay back the loan until the home is sold or vacated by the homeowner. As long as you live in the home, you are not required to make any monthly payments towards the loan balance, but you must remain current on your property tax and insurance payments. In addition, reverse mortgages are only available to people over 62 years of age.
Typically, reverse mortgages do not affect the income taxes of the homeowner. However, they can impact income eligibility for certain government assistance programs. Medicare and Social Security are currently considered entitlement programs based on your age alone, rather than your income and assets. Therefore, a reverse mortgage will not affect your entitlement to those programs. However, other government benefits such as Medicaid, Supplemental Security Income (SSI), Food Stamps, Housing Assistance, etc. are means based and therefore the proceeds from a reverse mortgage could affect your eligibility for some government assistance programs. In the event you obtain a lump sum payment and put those proceeds into a checking or savings account, those funds would be considered an asset and likely cause to you become ineligible for some government assistance programs.
While there are advantages to reverse mortgages, there are also many disadvantages. Often times, the children or other beneficiaries of an estate for a person that obtained a reverse mortgage are unable to satisfy the outstanding debt on the residence because no payments are being made to reduce the outstanding balance which continues to increase month-by-month. In that case though, the family is not required to pay the exorbitant debt, but the house can essentially be turned over to the bank for foreclosure.
In addition, difficulties sometimes arise if the owner of the residence is required to vacate the home for a period of time to help care for a sick loved or requires assistance with their daily living activities. In some situations, if the homeowner does not continue to reside at the home for a specified period of time, the bank can proceed with taking possession of the residence pursuant to the terms of the reverse mortgage.
In contrast to traditional mortgages, reverse mortgages generally have significantly higher fees and interest rates. Since no payments are being made, the interest compounds over the life of a reverse mortgage, which means the debt can exceed the value of the home within a few years after the initial lump sum distribution is made.
If you are considering a reverse mortgage, it is best to shop around. Just as with traditional mortgages, you should compare your options and the terms available from various lenders. Before you talk to a lender, you should do your home work and learn about reverse mortgages so that you can ask the appropriate questions. Unfortunately, some lenders offering reverse mortgages have been known to take advantage of the elderly. If you do not understand the costs or features of a reverse mortgage, you should not sign anything until your questions are answered. If there is pressure or urgency to complete the deal from the representative of the lender, you should walk away and take your business elsewhere. It is also a good idea to consider seeking the advice of a family member, friend, or someone else you trust.
If you or loved one needs to discuss the possibility of taking out a reverse mortgage as part of your overall estate plan, the estate planning lawyers at Durden & Mills, PC can assist you. Call us at (706) 543-4708 for a free consultation.