Reverse mortgages are among the most misunderstood processes in real estate; your clients should be sure to understand its pros and cons before making any final decisions.
Essentially, a reverse mortgage allows homeowners over age 62 to sell their home without having to leave it. Typically, you sell your home to a reverse-mortgage lender for a choice of one sum, an income stream or a credit line. All the while, you are allowed to remain in your home until you die, move on (for example, to a nursing home), or if your family decides to pay off the loan and keep the home.
Keep in mind that most middle-class families are not in the position to take over the responsibility for a second home if they are already paying a mortgage on a first home.
Obviously, money is the main reason why homeowners — particularly seniors — would decide to go with a reverse mortgage. Social Security surely doesn’t cover all the costs of retirement, and a majority of Americans have not saved or invested enough to be financially comfortable in their later years. Staying in your home while living off the loan is appealing to many people. In addition, a reverse mortgage is tax free.
Of course, we’ve all learned in life that there is no such thing as a free lunch. Not all reverse mortgages offer as much money as requested, which could be a negative to those who have paid off their house or owe just a little bit on it. The value of the reverse mortgage loan may depend on how long you are expected to live, the value of your home, the current interest rates, and your home’s equity.
Most reverse-mortgage loans require closing costs and higher interest rates. And your property taxes and home insurance, as well as repairs and maintenance, will not go away.
Possibly most importantly, a reverse mortgage may disqualify you from being eligible for Medicaid or even Social Security.
However, you may want to advise your clients that many reverse mortgages are new and somewhat improved, thanks to some governmental reforms. One example: most loans limit your first-year withdrawals to no more than 60 percent of the total sum of the loan, in order to prevent overspending. Spouse protection is also more of a factor in reverse-mortgage applications these days, as well as more sharply focused concentration on income and credit history.
U.S. News and World Report advises you to check your equity first. A reverse mortgage is a considerable option depending on the amount of equity you have in your home. One alternative to a reverse mortgage is to simply sell your home and move to a cheaper property, keeping the equity you have earned.
Another alternative to reverse mortgages is to sell your home to your children, according to Investopedia. The form would come in a sales-leaseback agreement, in which you sell the house to your children and then rent it back using the cash from the sale. Your children become your landlords and will be able to deduct for depreciation, real estate taxes and maintenance.
As an agent, it may be best to refer your client to a tax specialist or attorney before they make any final decisions on reverse mortgages.
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