Many physician homeowners have been roped into watching a commercial for a company selling reverse mortgages, usually presented by a stalwart actor that we like and trust. Whether a reverse mortgage is right for you or not, it’s a good idea to understand exactly what it offers and what it plans to take in return.
Although the name reverse mortgage may imply some type of payout, it is important to remember that it is basically a loan. According to the Federal Trade Commission (FTC), a reverse mortgage is a loan available to older adults that is basically an advance against your home equity. You convert your home equity into monthly payments, which are usually tax-free, and you are able to retain the title of your home so long as you live and so long as you stay within that home.
When you pass away or if you decide to sell your home, the loan will need to be repaid—usually through the selling of the home. This, of course, lessens any inheritance that you could pass on to your heirs. The FTC cautions that these transactions can be complicated and require a great deal of review to ensure that it is a good fit for you.
Some of the things to look out for when considering a reverse mortgage include:
- There are some unsavory institutions that are looking to take advantage of older adults, who are a prime target for reverse mortgages. If you have a parent or older loved one, be sure to keep the lines of communication open regarding these types of financial discussions and stay alert for red flags like complicated fine print. You may even want a trusted attorney to review the paperwork before going forward.
- Just like many other complicated financial transactions, there are fees and costs associated with setting up a reverse market, so shop around before committing to any plan.
- Estate issues. You need to determine if your spouse will still be able to stay in the home if you pass away first. Some reverse mortgage contracts include this, others don’t. Also, if you pass away before you received payments equaling the value of your home’s equity, will the unused draw be able to be inherited? These are all details that should be addressed in the contract.
- Soaring interest. Many reverse mortgages have variable interest. Yes, you will be paying interest on your reverse mortgage because it is technically a loan. If the interest isn’t fixed, you could be paying far more than you expected—and this interest isn’t tax-deductible.
- You will still need to maintain your home. So, if the water heater breaks or an appliance dies, it is up to you to replace it.