How does a reverse mortgage work?

By: Kevin A. Guttman, Reverse Mortgage Planner – NMLS #384936

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George and Danette Pomponio couldn’t stop bragging about their 6 kids and 14 grandkids, ranging in age from 18 months to 18 years. Two of their children lived close by, but the other four were out of state. The Pomponios had decided they wanted to move somewhere warmer and downsize from their four-bedroom house that required a lot of yard work. They’d always been ones who wanted to have a Snowbird lifestyle, and after a recent trip to Tennessee, they decided they wanted Franklin to be their permanent retirement place. George had grown up there, so there was family close by, plus they loved the climate. With the money from the sale of their home, they would be able to purchase a home outright and even put some money into the bank.

George, a retired mechanic, looked forward to not having the responsibilities of yard and house maintenance. Danette, a former school administrator, was hoping to find something part time just to give her something to do. Recently, their long-time friends, Peter and Judy, had told them about a positive experience they had with a reverse mortgage loan and encouraged them to consider it. The Pomponios had reservations because they didn’t feel that they had any money problems and thought reverse mortgages were simply for people who were down on their luck. Peter explained that he originally thought that as well, but their CPA had suggested because of the increased cash flow it could provide for them, which is usually tax free.

George and Danette decided to speak to a reverse mortgage planner to see if a reverse mortgage loan was right for them. The planner explained that they could buy their new home using a reverse mortgage loan, which would give them an opportunity to not have a monthly mortgage payment, although they would still have to pay taxes, insurance, and maintain the home. Additionally, they would only have to pay a down payment of around 40 percent.

They might be able to keep some of their cash from the sale of their home to invest or perhaps even increase their buying power. Meaning, they could put the full amount they received from the sale of their home into the purchase of the new home, and the reverse mortgage loan would cover 60 percent of the purchase price.

Together with their financial advisor, who was a retirement income certified professional (RICP), the Pomponios worked out a strategy that could extend their retirement funds. As a result, they had peace knowing they were better prepared to not outlive their funds. It made sense to them, as they knew their children wouldn’t want their house in Tennessee. Having access to their equity now was right for them.

The Pomponios are enjoying retirement in their new home. They chose a retirement community with an active lifestyle that has allowed them to make friends and have main-floor living that will accommodate them for many years to come. Their children and grandchildren enjoy visiting in Tennessee and creating lifelong memories. And, George doesn’t miss doing yard work or house maintenance.

How does a reverse mortgage work?

photos by Evan Semón

NOTE: Story is for illustration purposes only. The persons depicted herein are fictional and any resemblance to actual persons is a coincidence.

*This advertisement does not constitute tax advice. Please consult a tax advisor regarding your specific situation.