Financial pathways: The lowdown on reverse mortgages (column)
November 15, 2016
I enjoy your column in the Summit Daily and have a question for you. My husband and I are 72 and live in Summit County. Our home is worth approximately $750,000 and we owe $130,000. We are having difficulty living on social security and a meager retirement income. Would a reverse mortgage be a good idea for us if we want to try and stay in our home? — Suzanne
I usually only recommend a reverse mortgage as a last resort after several considerations. So here are some questions for you to assess the situation and explore potential options:
1. What is the interest rate on your mortgage and when will it be paid off?
2. How long have you lived full-time in your home?
3. Can this home accommodate you and your husband for the rest of your lives, taking into consideration the following:
a) Is it a one-story home or the master bedroom and all essential rooms on the first floor;
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b) Can you both continue to live in the mountains for the rest of your lives — no problems or anticipated problems with breathing at this altitude or hardships with cold winters (these are common issues as people get older);
c) How hard is it to care for your existing home (i.e. large house, too many levels, long driveway to shovel, too much land); and
d) Is it convenient to a grocery store, etc. or is it in a remote or somewhat remote area out of town.
4. Do you have children or loved ones close by? If not, has there been any discussion about moving closer to them? Do they want you to be closer?
5. Just how important is this particular home to you and your husband and why?
These are all questions you and your husband will need to sit down at the kitchen table and answer in a heart-to-heart discussion. If you can honestly agree that your current home is perfect for the rest of your lives, then the reverse mortgage is a possibility. If not, another possibility is to sell your existing home and buy one that better meets your needs long term and you have no mortgage. This would be a less expensive home and the sale, depending on the price of the new home, would allow you to get some of the equity out of the first house, as well as lower your expenses. This would include taxes and insurance. If you have lived in your existing home full time for two of the last five years, there will be no capital gains up to $250,000 each or $500,000 for the two of you. If making this move does not take care of your cash flow and you have really looked at your budget and cut away unnecessary expenses, then a reverse mortgage on the new home may be appropriate, if it meets the criteria of No. 3 above.
What I am trying to convey is the serious consideration that must be given before doing a reverse mortgage. If you plan on living in your home, be it this home or another one, for the rest of your lives and you have no desire to leave the proceeds of the sale of your home to your children or a charity at your passing, it may be the right decision. Do so with your eyes wide open.
Shop around to check the best rates and terms. Also, read all the fine print and do not allow anyone to summarize the "important points" for you. Good luck with your decision.
Nancy Gardner is a certified financial planner. She and her husband Bill and their dog Daisy split their time between Summit County and Montgomery County, Texas.
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