The Wise and the Wary
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Reverse Mortgages: The Pros
What's not to like?
Seniors have been tempted, this year more than ever, to access cash through this government-insured program. The obvious appeal is cash flow into a checking or savings account, rather than out. Proceeds from a reverse mortgage are used to pay off an existing mortgage more than 85% of the time. Any amount that exceeds the previous conventional mortgage balance is just money in your pocket. For those seniors who have seen their IRA balances plummet 30% to 40% in the last year, this cash seems like a godsend.
Seniors who are retired are often denied credit because of their lack of income. Home equity lines of credit and refinancing to lower mortgage rates are no longer available, since a proven income stream is a heavily weighted requirement for loan qualification.
Other seniors are using reverse mortgages to buy time until the housing market turns around. Their original plan was to downsize into a smaller home and free up some cash for retirement expenses, but that strategy has proven either too difficult or too painful since the housing bubble burst in 2007. No one likes to sell at prices 20% to 50% off their high of just a few years ago. A reverse mortgage allows sellers to immediately tap into the equity of their home while sidestepping the market for a time.
Finally, the reverse mortgage cash inflow is tax free, since the cash is considered loan proceeds, not income. Enhancing its appeal is the fact that the loan proceeds do not affect Social Security benefits.
So, what’s not to like? I’ll cover that next week.
By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog
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