News
Opinion
Sports
Business
Community
entertainment
Schools
News
Announcements
Classifieds
Place Ad
Advertising
Contact Us
Archives
Search

Is a reverse mortgage right for you?


As more and more Baby Boomers near retirement age, you’ll be hearing about the benefits of a reverse mortgage. But is it right for you?

Basically, a reverse mortgage is a way to convert the equity in your home into cash. It’s an adjustable-rate home equity loan that doesn’t need to be repaid until the borrower dies, moves or sells the residence.

The borrower typically must continue paying the taxes, insurance and upkeep costs of the home. When the loan term comes to an end, the borrower, or his or her heirs, then must repay all of the cash advances received, plus interest.


There are several types of reverse mortgages, but most share these similarities:

Generally, borrowers must be at least age 62 to qualify for a reverse mortgage. A spouse who is a joint owner of the home must meet this condition as well.

A reverse mortgage usually must be the primary debt against a home. If the borrower already has a mortgage, he or she must pay it off – possibly with some of the funds from the reverse mortgage.

Proceeds from a reverse mortgage may be received in a lump sum or as a series of monthly payments for a specified period of time, or for as long as the borrower (and spouse) lives in the home. Or, the reverse mortgage may be in the form of a credit line that allows the borrower to draw upon funds when needed.

The money received from a reverse mortgage is not taxable as income. In addition, the interest on the loan is tax deductible when it actually is paid – in other words, when the term of the loan comes to an end.

But because reverse mortgages are considered to be home equity loans, only the interest on the first $100,000 of the loan amount is tax deductible.

What’s the downside?

In simple terms, the chief drawback of a reverse mortgage is that it uses up some or all of an owner’s equity in his or her home. Thus, reverse mortgages usually should only be considered by individuals and families who have other significant assets.

In a reverse mortgage, the homeowner’s debt rises each time that he or she receives money. In addition, interest is added to the outstanding loan balance, and no repayments are made to the lender.

Unless the home’s value grows very fast, the loan balance will start “catching up” to that value. As a result, reverse mortgages typically are referred to as “rising debt, falling equity” loans.

Finally, reverse mortgages typically carry high up-front costs compared to “regular” mortgages. As a result, this kind of borrowing should be reserved for situations where the proceeds are intended to be used for a long period of time.

Most reverse mortgages allow borrowers to pay the initial costs with part of the loan – except, usually, for application fees.

A new study by the National Council on the Aging (NCOA) shows that reverse mortgages may have potential in addressing the issue of paying the costs of long-term health care at home.

According to NCOA, in 2000 the nation spent $123 billion a year on long-term care for people age 65 and older. Nearly one-half of such expenses are paid out of pocket by individuals, and only 3 percent are paid for by private insurance. (Government health programs pay the rest.)

In addition, according to the study, nearly a third of the 13.2 million people who are possible candidates for reverse mortgages already receive Medicaid or are at financial risk of needing Medicaid if faced with paying the high cost of long-term care at home.

“There’s been a lot of speculation whether reverse mortgages could be part of the solution to the nation’s long-term care financing dilemma,” says NCOA President and CEO James Firman. “It’s clear that reverse mortgages have significant potential to help many seniors to pay for long-term care services at home.”

Proceeds from reverse mortgages could be used to pay for a wide range of direct services to help seniors – including home care, respite care or adapting their homes to accommodate special needs.

In some instances, NCOA believes, reverse mortgages can mean the difference between staying at home or going to a nursing home.

As with any major financial step, it’s important to consult with a professional who can help determine if a reverse mortgage is right for you, or if other forms of financing can better meet your needs.



Jeff Francis is vice president and senior investment officer for First Tennessee Brokerage. For more information about this or other personal finance issues, please call (865) 971-2321 or visit your local First Tennessee financial center.

 

News | Opinion | Sports | Business | Community | Schools | Obituaries | Announcements
Classifieds | Place Ad | Advertising | Contact Us | Archives | Search

© 2004-2014 farragutpress