Beginning in October, the rules regarding who can qualify for a reverse mortgage and how much money you can draw against your home will be changing dramatically. The bad news is that, in many cases, you will not be able to receive as much money from the value of your home. The good news is that these changes may force people to use this important financial planning tool more prudently.
Reverse mortgages allow you to borrow money from a bank in return for a first mortgage on your home. No mortgage payments are due unless you die, sell, or move out of the house. The loan interest you would have paid every month in a normal mortgage situation is, instead, added to the loan principal. The amount that will eventually have to be paid back increases every month due to the increase of outstanding principal.
The amount you can borrow is a percentage of the value of your home. Since your remaining life expectancy and, therefore, the likely amount of total unpaid interest when you die, goes down, that percentage goes up the older you are.
The new rules will, in many cases, reduce the total amount that you can borrow against your home. The importance, though, is that your bank will be required to determine ahead of time whether you have enough income to assure that the real estate taxes and insurance can continue to be paid by you in the future. If not, the bank will be required to set aside an estimated total amount that would cover those future payments, leaving you with less money to withdraw for other purposes.
A reverse mortgage can be a wonderful tool for older folks who know that they want to stay in their home until they die and want to make sure they will have the resources to do so. The reverse mortgage funds can help you adapt your home so that it is a safe place for you to be, even if you become more frail or forgetful. These funds can also help you sleep better at night, knowing that if the boiler goes, the basement floods, or the roof blows off, there is money available to take care of these expenses. But, be honest with yourself. If you cannot afford the taxes and insurance on the house, especially if you’re younger (in my work, I tend to think of “younger” as under 85), then it may be better to sell your house, downsize, and bank the difference now. You may find yourself in smaller accommodations, but, you’ll sleep better with the extra money in the bank.