I recently checked with a loan officer to see if a "Reverse Mortgage" would be a viable option for my mother to supplement her social security income. Living in Northern Virginia is expensive. Real estate taxes are nearly $800 a month. Add in food, utilities and various medications and the monthly cost to survive is up towards $3,000 per month.
The starting point for a reverse mortgage estimate is the appraised value of the home. A maximum claim amount is set based on the appraised value and/or the FHA limit of $625,500. (The reverse mortgage program is a federally backed and the FHA limit applies.)
A "Principal Limit" is set based on the maximum claim amount. Bear in mind that interest accrues monthly on the unpaid escalating balance. This is the reverse of a standard residential home mortgage where the balance is reduced with each monthly payment.
In addition to the interest accruals, the reverse mortgage starts with a "balance". This "balance" is the up front cost to do business and is tied to the interest rate on the reverse mortgage. Due to this up front cost, the reverse mortgage is an expensive way to finance retirement in the short run. The longer one draws on the reverse mortgage, the lower the total loan cost rate will be. The initial start up cost for the loan on my mom's property would be $10,383.12.
Based on the amortization schedule provided, I was able to ascertain that a reverse mortgage was not in the best interests for my mother since she has a less expensive way to fill the gap between her monthly expenses and monthly income.
Over the course of 10 years the balance would be nearly $600,000 (draws + interest) on a home that is currently mortgage free. Interest was calculated at an annual interest rate of 5.790%.
I would recommend the reverse mortgage to those individuals that do not have a less expensive way to supplement their retirement income. The positives are of a reverse mortgage are as follows:
-monthly "draws" provide support to pay monthly expenses
-one never gives up title to the home
- one can live in the home forever (as long as they can care for themselves)
- the reverse mortgage does not effect social security or medicare
- the monthly payments are not taxable income
-one can extend the life of their portfolio income and assets (if applicable)
For more information please contact a reverse mortgage specialist.
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PS attached photo is a courtesy of freedigitalphotos.com