klaus
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Jun 28, 2005, 10:20 AM
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Reverse Mortgage: does it make sense?
Traditionally reverse mortgages have been a convenient way for cash-strapped seniors to access some of the equity in their home in order to supplement their lifestyle. While there has been some stigma attached to admitting that one has a reverse mortgage, (after all, it’s like admitting that you’re poor) having it can solve a lot of problems. I’m a firm believer in the concept of the reverse mortgage, as it enables seniors to do more than augment their income.
Maintaining one’s independence is a very important priority and a reverse mortgage can make it possible for seniors to extend that independence significantly. Part of maintaining one’s independence has to do with being able to remain in one’s home. The chores associated with living in a house can often prove daunting for seniors who may not have the physical wherewithal to perform maintenance tasks around the house.
This could be one very good way of putting a reverse mortgage to work. For those who are unfamiliar with the concept of a reverse mortgage, it is a financial product that’s exclusively geared toward mortgage free seniors. A reverse mortgage enables seniors to tap into the equity of their home, in some cases by as much as 60% of the total value, without ever having to make a payment. The financial institution advancing the funds will take repayment plus the agreed-upon accrued interest upon the eventual sale of the home or upon the demise of the owner, regardless of how long it takes.
So if you own a home worth $200,000 on the open market and you want to take a reverse mortgage, say for 60% of the home’s value, the financial institution advances $120,000 to the senior owning the home and the senior can use these funds in any way he or she wishes without ever having to repay one cent until the home is sold or the senior passes away.
At that time, the financial institution, which has a mortgage secured on the property is entitled to sell the property and take its principal and interest from the proceeds of the sale, or the senior’s heirs can pay out the principal and interest and keep the home. In either case, any amount above and beyond the mortgage and interest must by law be turned over to the senior’s estate.
The financial institution does take significant risk in that they agree to lend the money with no fixed term other than the stipulation that if the home is sold or the senior dies, then the bank will be repaid. This means that it’s plausible for a senior to continue living in his home until he dies and the bank has agreed to wait to be repaid until that time, even if it takes 20 years.
Personally, I like the idea of a reverse mortgage. Many seniors do not because they are thinking about their children’s inheritance. But then, when you consider that in the United States inheritance taxes are confiscatory, to put it mildly, and in Canada probating a will is also expensive; it only makes sense to enjoy the fruits of one’s labor while still alive. Besides, grown children should be able to look after themselves without counting on a windfall from a parent’s death.
So, does a reverse mortgage make good financial sense? On the whole I’d say it does and I think many seniors would benefit greatly by tapping into the equity of their home to help maintain their independence.
Klaus Rohrich is President and Creative Director of Taylor/Rohrich Associates Inc., a marketing and advertising firm that specializes in niche marketing retirement real estate developments http://www.maturitymarketing.com.
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