Why we think we want our homes free and clear:
The reason we as Americans want our homes to be free and clear of a mortgage run way back to the great depression era. The banks had a due on demand clause that enabled them to call the note on the home due. When they ran into trouble and needed money, they began calling notes due.
These people that lost their homes and went through the Great Depression told their children, and they told their children and friends to pay off your home as fast as possible so that the bank wouldn't call the note due.
This is why many americans to this day will pay extra on their 6% interest mortgage while running up 26% interest credit card balances. It is built in our psyche and when you point it out to people they will claim that their house is their retirement money.
Unfortunately Equity is something that will not pay the bills unless you are able to take it out via a mortgage. Not having a mortgage can be a very bad thing. Lets take a look at some real life examples.
I recently helped a couple with a free and clear home understand this and we began the process of a reverse mortgage, they are still going to make payments on the reverse to maintain the balance. When I got the tax bill I called them up immediately because I found that they owed over 2 years of taxes. They quickly understood why I was worried.
Because their house was free and clear with no mortgage they were liable for foreclosure. Any individual could go into the tax office and purchase their tax leins, and immediately begin the foreclosure process. Once that process begins the fees that are assesed are astronomical. This couple would have been able to finance their home with either a forward or reverse mortgage, but would have lost a lot of money.
I have seen other problems with free and clear homes. Homeowners insurance companies have historically not compensated victims of natural disasters on more than a few occasions. If these people had a large mortgage the homeowners companies would have been forced to make good on their homeowners insurance. At the very least, even if the homeowners company did not pay to repair the damages the owners wouldn't have lost 100% and they would have been able to sell their land or remaining home short of what was owed on the mortgage.
When I was recently speaking to an expert house flipper. I was suprised to find out the first thing he does after buying a house for cash, he secures a very large mortgage on the property from one of his other corporations. The reason he does this is just in case.
If anything happens even a slip and fall on the sidewalk, the first thing the attorney that would be representing the slip and fall plaintiff does is pull up the property and see if there is a mortgage on it. If there is no mortgage the attorney is definately going to take that case and try to take the home. If it has a large mortgage and is insured properly he will probably not even take the case.
The mortgage protects the homeowner in many cases and can asisst them in case of the god forbid situations.
Mortgage money is the cheapest you can get your hands on, and equity in your home is not accessible unless you refinance or sell your home. Normally when a homeowner needs to refinance because they fell on hard times, they aren't eligible for a standard refinance because they lost their job, or had to take time off.
Unfortunately that equity tied up in your walls and land is not something that you can pay your bills with when you really need it. Homeowners are far better off keeping a substantial nest egg in real liquid assets of some sort.
Another very important thing to consider is health care. They say 7 out of 10 people will end up in a permanent care facility or have a at home nurse taking care of us. Many seniors know that these permanent care facilities or even home care nurses are very costly and have heard the stories of families losing everything.
A reverse mortgage can protect your equity from being eaten up by medical costs. We highly recommend that you reach out to a reputable elder law attorney to discuss your options and asset protection devices such trusts to further protect your assets.