"Baby
Boomers," people born between 1946-1964, will begin to retire in
large numbers. As a result, the demographic shock of a shrinking
labor force and its effect on Social Security, Medicare, and other
government programs. By 2030, about 20% of the American population
is expected to be 65 or older, according to the Social Security
Advisory Board (SSAB).
With rising costs of living and a dwindling budget to accommodate
the elderly and disabled, we will see increased usage of the reverse
mortgage. This loan allows equity to be taken out of the home to
meet day-to-day expenses, and was designed in the late 1980s to help
those who owned property, but lacked sufficient income to live on.
However, there are benefits and disadvantages to be known before
going into this type of loan.
In most loan scenarios a home will go into foreclosure if payment
is not made. If payments are made, the debt decreases and equity
increases. The opposite holds true for a reverse mortgage; equity is
taken out of the home to sustain the family, causing debt to
increase while equity decreases. There is an exception - if the
actual value of the home increases, less equity will be lost
overall.
Most reverse mortgages are set up so there is no monthly payment as
long as the owner or co-owner(s) resides in the home. There are no
minimum income requirements, and the money can be used for any
purpose. Equity disbursed from this type of loan is tax-free.
Depending on the type of plan, reverse mortgages will usually allow
the owner to retain the title to the property until they have lived
in a different residence for 12 months, sell the property, die, or
the end of the loan term is reached.
On the flip side, reverse mortgages can be more costly than a
normal equity loan. Interest is added to the principal balance each
month, and the amount of interest owed is compounded over time. The
interest will not be tax deductible until the loan is paid off, in
part or in full. Also, since the reverse mortgage uses equity in the
property, this constitutes a loss of assets one could pass on to
heirs.
The Federal Trade Commission warns of abuse with this type of loan,
as they have received reports of predatory lenders taking advantage
of the elderly. It is best for the individual interested in a
reverse mortgage to research and obtain counsel from reputable
sources.* HUD does not recommend consulting an estate planning
service to obtain a referral to a lender. HUD provides this
information free to the public. Even if the home was not originally
an FHA loan, the reverse mortgage can be federally secured.
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