Don’t let a reverse mortgage drive you out of your home.
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When it comes to reverse mortgages, inflation should be one of your top concerns. Over time, inflation can take away the value of your pension benefits or the yield on a bond, but that’s the worst that can happen. With a reverse mortgage, inflation could take your home away.
Let’s review the basics again: With a reverse mortgage, you give the bank a mortgage on your home based on your current equity, and in return they agree to pay you a certain amount each month for a period of time – until you die, move or celebrate your 100th birthday.
Maintaining your home, the homeowners association, and paying property taxes are all part of the business. In addition, you have to live in the apartment as your main residence, so renting it out is not an option.
Now imagine that you own a $ 250,000 home and take out a standard home equity conversion mortgage (HECM) loan – one of the most common types of reverse mortgages – at age 65. Your payouts would be $ 754 each month. Instead of just discussing numbers, I’d like to show you how inflation affects your purchasing power:
Let’s start with the symbols. The grocery bag costs $ 357.40, which according to the USDA is the monthly grocery bill for an extremely thrifty elderly couple. The car represents average auto insurance of about $ 150 per month; the lightbulb has the average electric bill of $ 103.67; and the smartphone represents the average cell phone bill of $ 111. After adding that cost, that leaves about $ 30 for an evening at a decent restaurant.
The impact of inflation on your reverse mortgage depends on two things: how high it gets and how long you hold your reverse mortgage. If you are 75 or older, the impact of inflation in 2032 might not be such a big problem. Nonetheless, if you are lucky enough to live well into your 90s, it is worth considering.
The 2% inflation scenario is very optimistic. And even with this low level of inflation, you’ll be in big trouble by 2032.
Who carries the greatest risk from the downside of reverse mortgages?
While inflation will slowly weaken your purchasing power, unexpected bills – a sudden, large medical expense or a home maintenance problem – are what are likely to default you on a reverse mortgage.
If you are 62 years old and sign a reverse mortgage loan, you can be pretty confident that some major home repairs will be needed in the future. Or what if your home needs to be remodeled in old age to make it easier for you? Will you have the liquidity to pay for these changes?
Also, what if you get sick and cannot live in your home without help? Help at home doesn’t come cheap. How do you deal with these emergencies when you have no other source of income other than your reverse mortgage payments?
The bottom line: if you want to take out a reverse mortgage, you need access to extra funding to cover unexpected expenses or you are at high risk of losing your home.
Put both names on the reverse mortgage
Virtually every reverse mortgage nightmare story I’ve heard involves only one of two spouses having the reverse mortgage. When one died, the other became essentially homeless shortly afterwards.
Often it wasn’t a coincidence, just a bad decision. If there is only one name on the contract, the reverse mortgage payments are higher. Also, payments are based on the youngest person on the reverse mortgage. The older that person is, the higher the payments.
Here are a few examples of the temptation: A 77-year-old husband and 62-year-old wife could receive significantly higher payments if they only put the reverse mortgage on the husband’s name. There is also the special case of having a spouse under the age of 62. Both spouses must be 62 or over to take out the reverse mortgage. As a result, there have been nightmare cases where one spouse is 62 and the other is 58. The elderly spouse dies and the other has a large bill to pay or the house is sold.
Here’s our advice against the temptation to give just a name in exchange for a higher payment: Just don’t do it. Put both spouses on the reverse mortgage.
A reserve mortgage is a good option for some even with these risks. If you are considering one, I recommend starting with the HUD consultation; Here is a list of the approved agencies.
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