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Big Myth: Reverse Mortgage Destroys Inheritance

Tuesday, 05 August 2014 02:51 PM

 Nothing strikes fear into the hearts of drooling heirs like the words “reverse mortgage.”

According to an April 2014 New York Times article, elder law and reverse mortgage experts say they “frequently encounter resistance from children” of seniors considering reverse mortgages, largely because of concerns about “losing their presumed inheritance.”

However, those voicing this fear may be only considering two possibilities – take out a reverse mortgage, which involves costs, and doing nothing, which is not a real option for seniors who need help with daily living expenses, medical costs, or creating a more comfortable and secure lifestyle. Any form of borrowing – not just reverse mortgages -- creates a liability which offsets assets in the estate, and therefore lowers its value.

Realistically, the choices are:
  • Get support from family (which preserves the inheritance by taking money from heirs now)
  • Borrow with credit cards, personal loans, or home equity financing (which reduces the inheritance by the amount borrowed plus accrued interest)
  • Sell the home, buy a less expensive one and use the remaining proceeds to supplement living expenses (which reduces the value of the inheritance and comes with significant transactions costs)
Are you eligible for a reverse mortgage? Find out how much you qualify for.

Home Equity Financing

If homeowners can qualify for home equity loans or lines of credit, they should obviously choose that route over a reverse mortgage because it is less costly. However, the main reason for the cost reduction is that the borrower makes monthly payments to reduce the balance over time. Homeowners who can’t afford such payments won’t qualify for traditional home equity financing. One option is for the heirs to take such a loan against their own property for the benefit of their relatives, or to co-borrow the money.

Credit Cards

What about credit cards? According to USA Today, credit card balances of senior citizens tripled between 1989 and 2010 as they attempted to make ends meet in a sour economy. The average credit card interest rate for variable rate cards is 15.63 percent as of June 25, 2014. On June 25, 2014, an online search turned up considerably lower fixed reverse mortgage rates of 6.63 percent and variable reverse mortgage rates of 3.99 percent.

Personal Loans

Personal loans are unsecured advances which are repaid over fairly short terms – generally one to five years. Interest rates for personal loans range from just under seven percent to over 30 percent, depending on the borrower’s credit rating. Reverse mortgages do not carry the same penalties for applicants with lower credit scores, however, because monthly payments are not required. Personal loans can be good sources of cash at reasonable cost, but qualifying is relatively difficult because of their unsecured nature.

Click here to see how much money you could qualify for with a reverse mortgage.

Selling the Home

For those who don’t qualify to borrow the traditional way, selling their property is an option. Keep in mind, though, that the average real estate transaction costs the seller ten percent right off the top, and buying the new home costs another two percent on average (assuming that no mortgage is obtained) – which significantly reduces the potential inheritance before the sellers spend a cent of the proceeds.

Reverse Mortgages: Worry about Terms, not Inheritance

The vast majority of reverse mortgages taken out are not schemes dreamed up by evil geniuses looking to bilk seniors out of their nest eggs. In fact, the most popular plan, the Home Equity Conversion Mortgage (HECM), is backed by the government. HUD makes the rules, sets limits on fees, outlaws practices it considers detrimental to seniors (such as mortgage lenders marketing annuities in conjunction with the reverse mortgage), and requires borrowers to obtain counseling from HUD-approved reverse mortgage counselors before they can close on a reverse loan.

Family members who are concerned (and whose participation is welcomed by the homeowners) can work with their loved ones to help them evaluate offers from competing lenders and choose the one with the lowest cost and best terms.

Are you 62 years or older and could use some extra money during retirement?

In the long run, the loan with the lowest cost is the one that can best protect the interests of the next generation.

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Nothing strikes fear into the hearts of drooling heirs like the words "reverse mortgage." According to an April 2014 New York Times article, elder law and reverse mortgage experts say they "frequently encounter resistance from children" of seniors considering reverse...
lendingtree, reverse, mortgage, inheritance
Tuesday, 05 August 2014 02:51 PM
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