In talking with people about reverse mortgages, two common objections often arise; 1) “I own my home free and clear, so I don’t need a reverse mortgage”.
And 2) “I already have a mortgage, I can’t get/don’t need a reverse mortgage”.
While I understand the intent of these responses, they are based in ignorance.
Most people who offer one of these objections, are sure that reverse mortgages are terrible and not for them even though they will readily admit that they
don’t really under-stand them.
The goal of this article is to address these two objections and explain the pros and cons of getting a reverse mortgage on a home that you own free and
clear, as well as the pros and cons of doing it when you have an existing mort-gage on your home.
First, if you own your home free (without an existing loan against it), there are a few reasons why you might want to take a closer look.
You can use a portion of the equity in your home to create a steady, guaranteed monthly income that you never have to repay as long as you live in your
If you own your home free and clear, but don’t need the extra monthly income, you can choose to set up a reverse mortgage line of credit that gets larger
over time. This growing, guaranteed LOC can be used in place of drawing down investment ac-counts during a down market and then repaid once the stock
market improves, if you want to.
Since you are only charged interest on the amount of the LOC that you actually use, some people use the benefit of the growing LOC as a reserve account
that can be used at a later date to cover in home long term care costs extending the length of time that they can stay in their home.
The LOC can be used for anything that you choose and you never have to make a payment until you permanently leave the home.
The down side with this scenario is that you are using a portion of the equity in your home. Of course if you don’t use much of the LOC or receive it as
a monthly income, the balance on the reverse mortgage will grow at a fairly slow rate. But you will not be leaving a free and clear home to your heirs.
There will be a loan balance on the home, the size of which will vary depending upon how you use the loan.
However, while there will be a loan balance on the home, you will never leave a loan balance beyond the value of the home. Mortgage insurance protects
you, your heirs and your estate against ever having to pay any money out of pocket when you are gone.
If you have an existing loan on your home, (a first or second mortgage, or home equity line of credit—HELOC, or other lien), it has to be paid in
full in order to qualify for the reverse mortgage.
This works just like a standard refinance loan where you use proceeds from the new loan (the reverse mortgage), to pay off the existing loan on your home.
The benefit to this strategy is that since you never have to make mortgage payments on a reverse mortgage loan, by using it to pay off a regular mortgage,
you get our from under the requirement of making a monthly mortgage payment.
However, while doing a reverse mortgage gets you out from under the monthly mortgage payment requirement, remember that it is still your home and you are
still responsible to pay your property taxes and homeowner’s insurance premiums.
For example, let’s assume that you have home worth $200,000 and have a $100,000 mortgage balance with a monthly payment of $700. You do a reverse mortgage
loan to payoff the $100,000 loan balance and get rid of the $700 monthly payment.
Not so fast. If part of the monthly payment also includes an escrow for your property taxes and homeowner’s insurance of $180, you still have to pay that
portion yourself. So the reverse mortgage saves you $520 per month ($700-$180 escrow payment = $520).
In this scenario, the reverse mortgage does not create a monthly payment to you, but it does save you from paying $520 per month.
Additionally, if you qualify for extra money beyond the payoff of your existing mortgage, that money can be used to set up a line of credit for future
As you can see, it doesn’t matter if you own your home free and clear or if you have a loan against it, a reverse mortgage can be customized to fit whatever
your situation may be.
Contact me for a free, no obligation personalized quote to see how
a reverse mortgage might work for you.