Recently my brother started asking questions about reverse mortgages as he has now hit that age where he realizes he needs to really start thinking about his retirement prospects. Although I hold an MBA degree and have been interviewed on several radio talk shows about various financial options, my older brother still feels he can get better information from people he meets at the supermarket or gas station. For all of you approaching retirement and are considering reverse mortgages to supplement their income, I will now give you my thoughts on this subject.
The commercials on television paint a rosy picture of reverse mortgages and for a relatively few they make have some merit, but I sincerely doubt for the majority of people they are the way to go. Many of the claims made by TV spokes people who we have come to love and trust over the decades are seriously misleading and claims of income for life and that you will never lose your home are mostly untrue. Reverse mortgages are available to homeowners who are 62 years of age or older.
When you buy your home with a normal mortgage you are borrowing money from a bank or financial institution and make monthly payments to that lender. When to take a reverse mortgage the lender makes monthly payments to you and for most you do not have to pay that loan back for as long as you continue to live in that home. The loan will be repaid when you either sell your house, die or if that home is no longer your primary place of residence. Here it is…you are financing your retirement by going into debt! When you are older you should be getting out of any existing debts. You have built up equity in that home over the years and a reverse mortgage basically reduces that equity with each payment you receive, or as a lump sum payment or even a line of credit.
It’s also important to remember that you are still responsible for the up keep of your home, the property taxes associated with that home and any insurances required for that home. Interest can still accrue over the life of the loan and with an uncertain economy what you owe can eventually surpass what your home is worth. There are also cases in which those who took the loan while too young (right around 62), and spend the lump sum payment too quickly could find themselves with no equity left in their home as a source of income. They could lose the home and have no income.
Another potential issue with Reverse Mortgages is that they tend to have excessive fees and that can actually add up to 8-10% of the actual loan amount. In addition to origination fees and the normal fees such as closing costs, you will more than likely need to purchase insurance in the event the loan amount is ultimately greater than what you can sell your home for. There are several other fees that you will be responsible for a mandatory credit-counseling fee, which is paid whether or not you qualify for the reverse mortgage.
OK, so now if I have sufficiently scared you off the Reverse Mortgage bandwagon, lets give some thought to alternative methods to assist you in preparing for retirement. My first suggestion and the one I use in the argument with my brother is to downsize, baby, downsize! I understand that many people do not want to sell their current homes and move, but most of those who are thinking about reverse mortgages don’t have many friends or family that they can turn to for help. For older folks, this may be too much a strain, after all, there are years of memories in that home and a familiarity of the area that you have lived in for quite a while. Depending on what you can sell your house for and where you want to move to, this can turn into nothing more than a lateral move, so give it some serious thought and perhaps move to an area with a much lower cost of living.
If you have dutifully keep a good credit rating and have some other assets you may consider taking out another mortgage on your home and if you are older yet can still qualify for a mortgage, you will also have to consider whether or not you really want the hassle of making payments after you finally finished paying the house off.
The reason many flock to these reverse mortgages is basically that it allows you to live in your own home and possibly your current lifestyle while tapping into the equity built up in that home over the years and not having to pay any current interest payments on that home. It is risky and can ultimately cause you to lose the home you so much wanted to keep, but for some it may be the only answer. Think very hard before making this decision and also before spending a lot of money on fees etc. Consider first spending a few dollars on a consultation with a reputable financial advisor.