The benefits of reverse mortgages are substantial. You can tap into your home equity and receive cash payments. The loan only has to be paid back when the last surviving borrower permanently moves out, sells the home or dies. You don't get taxed on your payout and you can still receive your full Social Security and Medicare benefits.
Reverse mortgages have their downside too. Upfront costs are heftier for reverse mortgages than for conventional mortgages and are usually paid out of the home's equity. Real estate taxes and homeowner's insurance will still be your financial responsibility. You'll be obligated to carry expensive mortgage insurance in order to safeguard the lender in the event that the value of your home decreases or if you continue to hold the mortgage for a longer-than-average period of time. If you don't properly maintain the property, the lender is entitled to take it back. Similarly, if you leave for any extended period to stay in a nursing home or hospital, even if your intention is to return to your home, you can be required to repay the entire balance of the loan plus interest. Lastly, the interest on your debt with a reverse mortgage accrues with time and the increase compounds. This means that the equity of your house decreases at the same rate. When you move out permanently or die, the entire loan balance will have to be repaid, up to a maximum of the home's appraised value when it is sold.
Federal law gives homeowners taking out a home-equity loan, mortgage refinance or reverse mortgage a "right of rescission," the AARP states. That means you have three business days--including Saturday--after closing on the reverse mortgage to cancel the deal with no penalties. You have to do it in writing, whether by fax, telegram or letter, and it must be delivered to the lender by midnight on the third day.
To qualify for a reverse mortgage, the senior must own the home free and clear, the federal Department of Housing and Urban Development states. If the home still has a mortgage, the owner will have to pay it off at closing, cutting further into the proceeds of the reverse mortgage.
Owners can receive reverse mortgage payments in several forms: a lump sum, a line of credit, monthly payments or a combination. In any form, if the money isn't spent immediately, the remaining money will be counted as an asset if you're receiving or applying for Medicaid, according to Investopedia. As an asset, it could affect your Medicaid payments.
If an owner has to move out of the house for a certain period of time--to a nursing home or a hospital, for instance--that absence could be enough to trigger the repayment requirement, Investopedia states. With an FHA reverse mortgage, the owner can spend up to 12 months in a nursing home without the debt coming due.
If a homeowner dies, his estate will have to pay off the mortgage, plus the interest, Investopedia states. Depending on the size of the debt, that could require selling the family home instead of passing it to the heirs. However, if the sale of the house doesn't cover the mortgage debt the heirs cannot be held liable for any more money.
The allowable loan amount for a reverse mortgage varies based upon numerous factors, including the age of the borrower, the appraised value of the home, the home's location, and the current interest rate at the time of the reverse mortgage transaction. A borrower must be 62 or older to complete the transaction, however, the closer a borrower is to age 62, the smaller the percentage of the house's value he will be able to borrow. For example, a homeowner who is 62 would be eligible to borrow only $99,749 on a $250,000 house, versus a homeowner who is 80 who could borrow $145,029 on a $250,000 house. Additionally, if the home has a traditional mortgage, that mortgage must be paid in full from the proceeds of the loan, leaving the borrower with even less equity to use for other purposes.
If a borrower's monthly income is increased by a reverse mortgage, or she deposits a large lump sum in her bank account from the proceeds of the loan, she could be disqualified from receiving Medicaid benefits. A senior citizen who has more than the allowable assets as a result of obtaining a reverse mortgage may lose eligiblity for nursing home care. It should be noted, however, that Social Security and Medicare benefits are not affected by a reverse mortgage transaction. Potential borrowers must weigh all the options before procuring a reverse mortgage. Federal guidelines require that all borrowers looking for reverse mortgages go through a basic course on this loan product to learn all the pros and cons prior to finalizing a loan.
A reverse mortgage is due in full when the last borrower dies, sells the property or no longer is able to live in the home. All or part of the home's equity is tied up by the reverse mortgage. A borrower who needs to sell his house due to financial issues, such as medical bills from a serious illness, may not get any money from the sale of the house due to the reverse mortgage. The heirs of a deceased borrower can end up in the same situation, and have no way to get money from the sale of the house to pay the expenses of the estate.
You are correct, I did read Butterflys note, thats the kind of term that would make me lose sleep.
might be better to just sell it and get something more manageable.