Q: What are reverse mortgages and how do they work?
A: Reverse mortgages allow retired homeowners to take equity out of their homes on a monthly basis and can be helpful to retirees who may not have enough money to live comfortably. Upon the homeowner’s death and subsequent sale of the home, any accrual of mortgage debt is deducted from the estate.
The disadvantages are that reverse mortgages may leave less of an inheritance for your children, and, because they are based on the value of a person’s home and the owner’s age, they may not be advantageous to those with less valuable homes who will need to draw an income for an extended period of time.
“The mortgage company is looking for how much it can make. It’s got to be profitable, or it’s not going to be willing to offer
it,” says Carol Nowka, a Nebraska-based certified financial planner. “A reverse mortgage might work in New York, Boston, or Los Angeles, but not in places like Nebraska because our homes are not of sufficient value.”
For example, a person with a life expectancy of five years and a home worth half a million dollars may be able to get around $2,000 a month. But a person with a life expectancy of up to 30 years with a home worth $50,000 may get closer to just $50 a month, according to Nowka.