Showing posts with label pros and cons of reverse mortgages. Show all posts
Showing posts with label pros and cons of reverse mortgages. Show all posts

Wednesday, August 12, 2015

Mortgage, No Mortgage, Reverse Mortgage or Rent?

Once you decide where you wish to live during your retirement, you need to consider how you will pay for your residence.  There are issues to consider no matter what you decide, and this article will give you an overview of some of your choices.  You might decide to get a traditional mortgage on your home, just as you have done during your working years. You could choose to pay cash for the home with savings or the equity from the last home you sold prior to moving into your retirement community.  You might decide to stay where you are and use a reverse mortgage to pay off your current debt and fund other retirement expenses.  Finally, you could choose to invest the proceeds of the last house you owned, and rent your retirement home.

Pros and Cons of Having a Mortgage on Your Retirement Home

*  Advantage: You can use the mortgage interest deduction to reduce the amount of income taxes you will pay.  This is especially useful for people who expect to pay high taxes, especially now that they will no longer have other types of deductions, such as business expenses.

*  Advantage:  Money that would have been put into a home, could be channeled into investments that would increase your income, instead.  This gives you the double advantage of increased tax deductions and increased retirement income.   This option is best for high net worth people with a large tax liability, who want to maximize their deductions.

*  Disadvantage:  Some people do not want to carry debt during their retirement.  It can cause them to experience additional stress and worry, especially if their finances are very tight.  They worry that something could happen to their investments and they would be unable to pay off their home.

Pros and Cons of Paying Cash for a Retirement Home

*  Advantage:  Many people feel more comfortable knowing that their home is paid off and they will have an inexpensive place to live, as long as they can pay the property taxes and insurance.

*  Advantage:  Many lower income retirees in moderately priced homes would not receive enough of a tax deduction to enable them to lower their tax liability more than if they simply filed using the standard deduction.  In fact, there is no tax benefit for some people who have a mortgage.  On the other hand, not having a mortgage makes them feel more financially secure.

*  Disadvantage:  When people pay cash for a home, most of their assets will be tied up in their house, which makes it more difficult for them to come up with cash in an emergency.  You do not want to pay cash for a house if it will use up all your cash assets, leaving you without any reserves.

Pros and Cons of Getting a Reverse Mortgage

*  Advantage:  People with a lot of equity in their home can use a reverse mortgage and use the money to pay off their traditional mortgage and/or use their home equity for other retirement expenses. 

*  Advantage:  You do not have to make payments or re-pay an reverse mortgage until you die, sell the home or move out.  If a couple lives in the home, however, it is important to make sure both of their names are on the reverse mortgage so that the loan does not have to be repaid until both of them have died, moved or decided to sell.

*  Disadvantage:  The equity in your home could be used up during the early years of your retirement, especially if you get the reverse mortgage soon after retiring, leaving you without an asset you can tap into during your later years.

*  Disadvantage:  You may not have any inheritance to leave your children.

Pros and Cons of Renting Your Retirement Home

*  Advantage:  Renting allows you to invest your savings and the proceeds from the sale of your last home in stocks, bonds, mutual funds or annuities, to maximize your retirement income.

*  Advantage:  Renters have the flexibility of quickly adjusting to changes in their financial situation or medical condition.  For those with serious health concerns, renting can make it much faster and easier to move into assisted living or a Continuing Care Retirement Community.  Upon death, it is often easier to probate the estate.

*  Advantage:  Renters in some areas may be able to pay far less in rent than they would in house payments.

*  Disadvantage:  Renters do not have the opportunity to participate in the increased equity they could receive during periods of real estate inflation.  They have to hope that this disadvantage is offset by rising values in their investments.

*  Disadvantage:  Renters who have investments may tap into them too easily, if they are not disciplined. This could lead to a decrease in their income later in life.

*  Disadvantage:  Renters do not have the advantage of reducing their income taxes by using the mortgage interest deduction.  They have to accept the standard deduction.  However, if their taxable income in low, a mortgage deduction may not be helpful to them, anyway.  This is often true for people who have most of their retirement assets in a Roth IRA or tax-free bonds, for example.

Bottom Line:  As you can see, there are advantages and disadvantages no matter which choice you make.  You have to know yourself.  Will you be more comfortable knowing that you own a house that is paid for?  There is a lot of value in that kind of peace-of-mind.  Or, would you feel more secure knowing that your money is invested and you have maximized your retirement income?  Do you feel comfortable with the idea of getting a reverse mortgage when the time comes that you need extra cash?  Would you like the flexibility of renting your retirement home?  Only you can decide which option will work the best for you.


"Cash vs. Mortgage? Here's How to Decide" by Marc D. Allan, Where to Retire Magazine, January/February 2015, pg. 32.

If you are looking for more information about where to retire, use the tabs or the pull-down list at the top of this article.  They will connect your to hundreds of additional, helpful articles on where to retire, financial planning, health concerns, family relationships and more.

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Sunday, April 28, 2013

Pros and Cons of Reverse Mortgages for Seniors

Many Baby Boomers have decided that they do not want to move to a retirement community or anyplace else when they retire.  Instead, they plan to age in place. They love their current home and neighborhood, and they have no intention of going anywhere.  For those retirees who have a lot of equity in their homes, most believe that they will have no problem continuing to live in their home.  After all, if home repairs are needed or medical bills pile up, they blithely assume that they can simply get reverse mortgages and tap the equity in their homes.  In some cases, this is a reasonable solution that has made it possible for thousands of seniors to remain in their homes.  However, in far too many situations this complicated type of loan has resulted in the loss of the family home along with all the equity that had been accumulated in it.  Before a homeowner considers this option, borrowers need to understand the advantages and disadvantages.

What are Reverse Mortgages?

Reverse Mortgages are loans that allow homeowners to borrow against the equity they have built up over the years. The homeowners do not make payments on the loan and the loan is not repaid until they either die or move out of the house. 

To qualify, the borrower has to be at least 62 years old.  They must either have paid off the house entirely or have a small enough mortgage that they can pay it off when they take out the reverse mortgage.  This loan is available to any homeowner, regardless of their income or credit rating. 

As mentioned, you do not have to repay the loan or even make payments on it until you either move out or die. However, you are expected to continue paying the annual property taxes and insurance bills on your home, as well as any homeowners' association fees and maintenance expenses.  If you fail to pay for the insurance and taxes, the company that gave you the reverse mortgage can declare you to be in default and foreclose on the home ... forcing you to move out.

Pros of Reverse Mortgages

There are advantages to these loans for some people, and they are certainly one tool that many have used to improve their quality of life as they age.

For example, if someone on a small fixed income is having trouble keeping up with their mortgage payments, a reverse mortgage can eliminate those payments for the rest of their life.  This may make it possible for them to continue to live in the home for years without house payments.

In addition, if someone has other debts such as large medical bills that they cannot afford, a reverse mortgage may enable them to pay off all their debts (including their remaining mortgage) and eliminate the payments.  Again, this can allow them to remain in their home for years and make it easier for them to survive on a small fixed income.

Cons of Reverse Mortgages

Unfortunately, not all the news about reverse mortgages is positive.  According to the April, 2013 edition of the AARP Bulletin, about 58,000 (or one in ten) of these mortgages end up in default.  Here are some of the problems:

People frequently take these mortgages out as soon as they can, often before they are even retired, and use the the money to finance their lifestyle.  If they face a real emergency in the future, they no longer have any equity left in their homes.  If the home requires major maintenance, such as a new roof, they are unable to come up with the money to make the repairs.  The federal government is concerned about these issues.  Skip Humphrey, who runs the Federal Office for Older Americans at the Consumer Financial Protection Bureau, has expressed concern that many borrowers are taking out these loans as soon as they turn 62.  The Bureau feels that these loans are more appropriate for people who are in their 70's or older.  (March, 2013 AARP Bulletin)

In addition to taking the loans out too soon, some people get into trouble with them because they cannot afford to pay the property taxes and insurance.  They may start out using some of the borrowed money to pay these bills during the first few years after they take out the loan.  However, eventually they run out of this cash and cannot borrow more.

There are problems with these loans for married couples, too.  If the older spouse takes out a reverse mortgage while the younger spouse is still too young to qualify, the younger spouse will be kicked out of the home when the older spouse dies.  This can be a serious problem for the younger spouse who risks losing their home and all the equity in it at the very time when they are also distraught  over the loss of their spouse.  Frequently, the home is only real asset the couple may own, and the result can be that the surviving spouse is left destitute.

Finally, many people do not realize that the up-front fees on reverse mortgages can be $10,000 or more, and these fees are financed as part of the loan.  

Proposed Changes to Reverse Mortgages

The AARP Foundation and some other organizations have filed suit to force changes in the ways that these mortgages are handled.  The Department of Housing and Urban Development (HUD) has also begun to make some reforms to these loans.  Among the proposed changes are:

Protecting surviving spouses;
Getting stricter about deceptive advertising;
Requiring a financial assessment before these loans are approved;
Requiring set-asides to cover future expenses such as taxes and insurance for a number of years.

Hopefully, the benefits of these loans will be preserved while some of the disadvantages will be minimized.

If you are interested in learning more about how to get the most out of your retirement planning, look through the five index articles listed below.  Each one contains links to nearly all the articles that have been written for this blog.

Gifts, Travel and Family Relationships

Great Places for Boomers to Retire Overseas

Great Places to Retire in the United States

Health and Medical Topics for Baby Boomers

Money and Financial Planning for Retirement

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