Reverse Mortgages as a Source of Equity

Because their home is their largest asset and their greatest source of equity, many choose to take out a home-equity loan. However, a home-equity loan may not be a sound option, since the money must be paid back, with interest. Luckily, there is another option available to seniors. A reverse mortgage allows them to gain equity without adding financial pressure to their lives.

A reverse mortgage is an easy way of accessing your home equity without creating monthly payments. The money received from a reverse mortgage does not have to be paid back during a person’s lifetime. Instead of making payments, as with a normal home-equity loan, the cash flow is reversed and the senior will receive payments from the bank.

Not everyone will qualify for a reverse mortgage. One of the major eligibility requirements is that the person applying for the mortgage be at least 62 years old and occupy the home as the principal residence for the majority of the year. The loan only becomes due when the last borrower permanently leaves the home.

What makes these types of mortgages so attractive is the fact that they are not credit-based. Therefore, income and credit history are not necessary for the person to obtain the mortgage. Another major benefit of a reverse mortgage is that the proceeds are tax-free and can be received in a number of ways. You can choose to receive the proceeds as a lump sum, in fixed monthly payments for as long as you live in the mortgaged property, as a line of credit, or through a combination of these options. These proceeds can be used for any of the following purposes:

  • daily living expenses
  • paying-off existing debts
  • home repairs and improvements
  • medical bills and prescription drugs
  • education
  • travel
  • long-term care and/or long-term care insurance
  • financial and estate tax plans
  • gifts and trusts
  • purchasing life insurance

While there are many benefits to this process, there are certain drawbacks that seniors should consider carefully before choosing this option. If, for example, the senior who takes out the reverse mortgage is not entirely competent, his power of attorney or guardian may be able to access the funds received from the reverse mortgage. Seniors considering a reverse mortgage should contact an elder law attorney who can guide them through the process.

Bernard Krooks is a New York Elder Law and New York Estate Planning lawyer with offices in White Plains, Fishkill, and New York, New York. To learn more, visit Littmankrooks.com.

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