Friday, October 17, 2014

Is a reverse mortgage a good idea

There is a lot of news out there about reverse mortgages and may have heard some bad things about them.  It's preying on the elderly, or just putting the heirs in debt when a house is left to the kids, etc.  While that ALL industries, there are some good things that a reverse mortgage could be an outstanding alternative for.  As the 'baby boomers' race to retirement, this will become a much more popular tool in the retirees lives.  So, let me give you some of the basics that you want to consider about a reverse mortgage and I'll start with the basics:

What is a reverse mortgage:  Simply put, a reverse mortgage is a mortgage that is placed on a free and clear home or almost paid for, where the owner can take out a lump sum payment or payments over time and supplement their retirement income.  To keep this simple consider this example.  These numbers may not be representative of an actual reverse mortgage and are only for examples to illustrate how this works:

             House value          - $100,000
             Amount owed       -       $0.00

             Reverse Mortgage - $75,000 (75% "LTV" or loan to value) it's technically not a loan!!

Option 1:  Take the $75,000 in a lump sum to pay off other bills, save, invest, etc.
Option 2:  Take the amount in payments over time of $312 per month for a projected 20 year period.

There is no interest charged or payments due until the owner is no longer living in the home. You don't make any payments while you draw on the equity in the home and you have no interest charged.  When you are no longer in the home, the company setting up the reverse mortgage will then take the home since they have a first lien and sell it or the heirs will negotiate to pay off the reverse mortgage and keep the home in the estate to be divided by the heirs.   It's a great way for someone not completely prepared for retirement financially to have much more security in their later years.  Now, that's the public face of a reverse mortgage that you see and hear in advertisements.

Now, here's the part you DON'T hear about.  You can use the money for ANYTHING.  So, lets say you have always dreamed of having a place in Florida to live in 6 months out of the year.  Take a reverse mortgage out, purchase a 4 plex; which is within the rules of the reverse mortgage guidelines.  Now, rent out 3 of the units and live in the other.  Another rule is that you have to live in the home the reverse mortgage is on for 6 months out of the year.  Now, not only do you have your equity working for you but you have rental income to live on AND a retirement place you've always dreamed of that is paid for.  When something happens to you, your heirs will now have rental income that will more than cover the cost of the reverse mortgage so they can refinance the reverse mortgage at a favorable rate that is paid for by the rental income plus have a place to vacation over the years.

With real estate being at a bargain price (that's a relative term you understand), you could take advantage of a fantastic opportunity to ride the appreciation swing up over the future years.  Not to mention the tax benefits received from owning investment property.

So, don't turn your nose up at considering reverse mortgages as a viable source of investment money to meet your retirement goals.  It could be that you will make MORE money in retirement than you make working!  Now, THAT'S what I call "the Golden Years"!