Berge & Berge, LLP Blog

Saturday, October 3, 2015

Understanding the Risks and Benefits of Reverse Mortgages

I am considering a reverse mortgage as a retirement planning tool. Is this wise?

A reverse mortgage is a retirement planning tool gaining considerable recent notoriety, due in part to the uptick in advertising featuring prominent senior-aged celebrities and former politicians. Financial experts, however, are growing increasingly wary of this retirement planning option, with many warning seniors to select this option only as a last resort.

A reverse mortgage is a secured financial transaction available for seniors aged 62 and older. In exchange for future equity in the senior’s home, a bank will forward a lump sum of tax-free cash to the homeowner. In general, the homeowner need not repay the balance until death, or may elect to repay the mortgage in monthly installments.

The problem with reverse mortgages most often occurs when the homeowner passes away and the promissory note becomes due immediately. In this scenario, children are often surprised to learn that their parent’s estate now owes a sizable debt – oftentimes up to the entire value of the home. To satisfy the debt, the estate usually must sell the home and pay the balance of the outstanding mortgage, leaving surviving heirs with nothing.

In another scenario of growing concern, one spouse takes out a reverse mortgage without the other spouse, who may be too young to qualify. Upon the death of the first spouse, the note becomes due and the surviving spouse must either find a way to repay the balance or sell the property all together.

While a reverse mortgage can be a seemingly simple way to gather cash upon reaching retirement age, it is not without risk. In many instances, there may be better options to help ensure surviving loved ones are not left without an inheritance or – in the worst case scenario – without a home.

If you are considering a reverse mortgage and would like to discuss your options, please do not hesitate to contact the Law Offices of Berge & Berge, LLP, serving the South Bay area of California, at 408-985-9918.

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