A typical method of monetizing real estate assets is taking a loan against the equity. But most monetizing strategies that involve conventional borrowing come with the obligation of regular scheduled repayments. A reverse mortgage is a unique monetization-by-borrowing agreement that offers flexible and deferred repayment options. Along with several other unique advantages, a reverse mortgage can be a very attractive asset for older individuals to monetize.
A reverse mortgage is a loan against the equity in a principal residence that provides you cash advances, but requires no mandatory monthly repayments during the life of the loan. Unlike a typical loan agreement, the cash flow is reversed – the bank is sending money to the homeowner, instead of the other way around. Hence, the “reverse” mortgage.
A reverse mortgage loan is not due and payable until the borrower ceases to occupy the home (i.e., the borrower sells, moves out permanently or passes away), at which time the balance of borrowed funds (including the accrued interest) is due. If there is any additional equity in the property, it remains with the homeowner or his/her beneficiaries. But while the house serves as collateral in a reverse mortgage, the lender has no recourse to demand additional repayment from any family member if there is not enough equity in the property to pay the loan in full; i.e., the borrower’s estate cannot be forced to pay the difference if the property’s value declines during the reverse mortgage.
Because the qualifications for entering into a reverse mortgage agreement are minimal, a reverse mortgage is one of the easiest monetizing strategies to execute. Applicants must be at least 62 years old, and the property in question must be the owner’s primary residence. The property does not have to be owned free and clear (although the reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds). There are no additional income, asset or credit requirements to qualify for a reverse mortgage.
As a general rule, the older you are and the greater your equity, the larger the reverse mortgage monetization. The amount of reverse mortgage benefit available will depend on your age at the time you apply for the loan, the type of reverse mortgage program you choose, the value of your home, current interest rates, and in some cases, where you live.
The proceeds from a reverse mortgage are tax-free and, depending on the type of agreement, may be received as a lump sum, fixed monthly payments, a line of credit, or a combination of these options.
Coordinating a Reverse Mortgage to Maximize Your Financial “Big Picture”
From this general overview of reverse mortgages, it should be easy to see the attractiveness of reverse mortgages for older homeowners. For those with limited financial resources, a reverse mortgage monetizes what is often one their largest assets, which can provide either additional income or a greater measure of financial stability. Even those who don’t “need” to tap the equity in their principal residence may find reverse mortgages worthwhile, because of flexible terms, tax advantages, or the capability to maximize other financial objectives.
For example, the National Care Planning Council offers the following commentary on how a reverse mortgage might be used to enhance an estate plan (from www.longtermcarelink.net):
When tax-free monies from a reverse mortgage are used for the purpose of funding insurance products, it gives homeowners, particularly those with substantial equity built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value. If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited) income stream of the borrower. When the insurance policy pays the benefits to the heirs, they receive tax-free dollars. Upon the sale of the property, any equity over the reverse mortgage loan amount will be subject to estate taxes, but ultimately, still revert to the heirs. With the unknown nature of the future real estate markets, the use of a reverse mortgage provides for greater control of the legacy assets by the senior homeowner.
A reverse mortgage can be an excellent monetization strategy for home equity, especially if the decision is part of a coordinated plan to maximize the value of other assets as well. Even if the property in question is considered a valuable inheritance asset, it may be possible to not only monetize the home under favorable terms today, but also ensure that it returns to the estate for future generations.
Note: This type of comprehensive planning is not a one-size-fits-all program. Tax, insurance and legal questions are best addressed by experienced professionals, and it is strongly recommended that you seek expert assistance when considering a reverse mortgage and any other related financial transactions. (In fact, FHA requires reverse mortgage borrowers to participate in a Credit Counseling session with an approved counselor early in the application process. When applicants complete this counseling, they receive a Counseling Certificate in the mail which must be included as part of the reverse mortgage application.)
“The problem is that no matter what you think of insurance, past problems, future difficulties, etc., risk management still is a mandatory element of financial planning.”
– Errold Moody
IF YOU WANT TO MAXIMIZE YOUR ABILITY TO OPTIMIZE A REVERSE MORTGAGE IN THE FUTURE, LAY THE FOUNDATION TODAY BY REASSESSING OR RESTRUCTURING YOUR LONG-TERM PLANS.
