This is my last post specifically about reverse mortgages—at least, for a little while. We’ve already talked about some of the cloudier aspects of reverse mortgages, including how the mortgage company can foreclose. Today, I’m going to talk about how much cash you can raise and what happens when you’re gone. The numbers I present are based on a real-world example.
- You raise cash with a reverse mortgage, but not as much as you might think.
The amount of money you can raise from a reverse mortgage is limited by the amount of equity in your house. Let’s say your house appraises $200,000, and you own if free-and-clear. The maximum many reverse mortgage will loan is 70% of your home’s appraised value less fees and closing costs.
Most reverse mortgages now pay out the majority of their cash distributions over your remaining life, as predicted by actuarial tables. If you’re expected to live another 15 years, the mortgage company would probably pay you about $652 each month or a total of $117,360 over those 15 years. That might not help you very much.Most people only get 50% of the equity in their homes. If you have an existing mortgage, the reverse mortgage company would pay off that mortgage and reduce your payout accordingly. In this example, the most you could get from a reverse mortgage if you still owed $100,000 would be around $50,000 paid out over your remaining life expectancy.
- You are leaving your legacy to the bank.
To qualify for a reverse mortgage, the youngest applicant (usually a married couple) must be at least 62 years old. So long as either applicant occupies the home full-time, the mortgage and the income stream from it remain in place. But as soon as the last applicant dies or can no longer live in the house, the mortgage terminates, and the survivors must either deed the house to the lender or pay off the mortgage at 95% of the value of the house.
Notice that I said, “95% of the value of the house,” not what is owed on the mortgage.If your house has appreciated, your heirs could have to pay more to save the house than you actually owe on it. And they have a limited time to comply. And this is true regardless of when the last mortgagor dies. If you and your spouse were killed in a car wreck two months after initiating that $140,000 reverse mortgage, the mortgage company could be due as much as $190,000, depending on the specific terms of your reverse mortgage.
This would not be that big a problem in most cases. We often buy houses from heirs that don’t want the trouble of liquidating their parents’ unwanted old house. But in today’s economy, more children (and even grandchildren) are living in the same houses as their parents and grandparents. That accident I spoke of could leave them homeless unless they are unable to pay off the reverse mortgage, usually over a shorter time than it takes to settle an estate.
My last word on reverse mortgages comes from one of my mentors. Phill Grove told me, “Normal mortgage companies want the interest and will work with people to ensure they continue to collect the interest. Reverse mortgage companies want the house and can be much harder to work with.”
If a reverse mortgage is right for you in your situation, there are a number of reputable companies offering them. But it’s never as easy as the advertising makes it seem. Please consider the motives of anyone (including me) who says a particular strategy is good or bad for you. Are they telling you everything you need to know?
Next time, I’ll talk about an alternative to reverse mortgages. You might be interested in this alternative if a reverse mortgage doesn’t meet your needs or if you don’t qualify.
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