Dear Mr. Livingston:
Could you give us the true low-down on “reverse mortgages?” They are flogged to death on TV, and seem sketchy. Thanks.
Dear Tom M.:
In a reverse mortgage, the homeowner promises to will his house to a firm in return for an income stream which is paid until death. If he wanted to do so, the homeowner could use the reverse mortgage to consume his wealth (the value of the home) without fear of being destitute in the event that he lives longer than expected. But there are some things he needs to understand.
The reverse mortgage is actually a home equity loan to the homeowner that must be paid back. As a loan, it has loan-related fees that must be paid. These are often high in comparison to traditional loans. There is also the interest that must be paid, which is also usually higher than a traditional loan.
The homeowner is responsible for paying all taxes, fees and insurance required on the house. The homeowner must also use the home as the primary residence. As long as the homeowner is living in the house, the loan does not have to be repaid. But once the homeowner is out for a year, regardless of the reason, loan payments must be made.
In the event the homeowner moves into another residence — say in the care of a relative or into an assisted living facility or nursing home — and is gone for a year, the loan payments come due. This could create a hardship for the family or the estate.
If the homeowner dies, the heirs will not be able to take possession of the home without either paying the loan payments or taking money out of the estate to cover the amount of the loan. If the payments cannot be made by heirs or by liquidating some of the estate, the house must be sold to pay off the debt.
You are correct in saying they are “sketchy.”