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Have I Got A Deal For You

Perhaps you’ve heard of the claimed benefits of reverse mortgages, which are touted to help you out in retirement if you’re short on monthly income.  And after all, these products are endorsed by more than one glib and graying famous actor so they must be good, right?

You know the drill:  Get a reverse mortgage and have no more mortgage payments!  All it takes is being at least sixty-two years old and an easy government-insured loan against your home equity.  You receive a lump sum or monthly payments for years to come and get to live in your house too!  What a concept!

I’m not here to say that reverse mortgages are some great evil.  But they do seem a bit devious.  I’ve always been leery.  For some reason, a red flag goes off every time I see one of those poker face ads.

For Sale: Borrowed Money

With a reverse mortgage you greatly increase the risk that you, your spouse or your family will get into financial hot water down the road.  Obviously, someone wouldn’t consider a reverse mortgage unless they were a little strapped for income in the first place.  First big red flag!  Who are they targeting?  Don’t those pesky payday loan stores target people who can least afford it too?  Hmmm…

So basically, because we need extra money to live on we are going to borrow it (with our house as security), right?  When does borrowing money to live on ever make sense?  At some point, especially if you did this at a relatively young age, you will run out of money.  Then what?  Eventually it ALL has to be paid back, with interest and fees.  Is your house really going to appreciate enough to keep up with all that?

You Mean It Will Cost Me?

You are still responsible for paying the insurance, taxes and maintenance on your home after getting a reverse mortgage.  So is it possible or even probable, being so short of cash in the first place, that you may not be able to make some of the insurance or tax payments along the way?  I recently read an interesting article (Kiplinger’s Personal Finance, 11/2012) that reported that 9% of reverse mortgage borrowers were at risk of foreclosure because they were behind on tax and insurance bills.  Another red flag.  Ouch!

Is it also possible that you may slack on doing all the necessary house maintenance since you’re on a tight budget?  If maintenance was neglected for many years (since to keep the house it will always be a priority to pay taxes and insurance first), then so much more money will be lost when your house is eventually sold.  Whose loss will this be?  The bank’s loss?  Your spouse’s or family’s loss?

And then the final red flag is the cost of the loan itself.  These are expensive loans.  You’re going to have to pay for an up front insurance premium (up to 2% of the value of the home, regardless of how much you borrow), loan origination fees (some up to $6000), traditional closing costs like appraisals and title searches, and other monthly service fees that will rob a huge amount of money from your home equity right off the top.  Any time you have a bank or lending institution “help” you with money you can guarantee that they will profit at your expense.  That’s just how they work.

Should I Or Shouldn’t I?

Given the costs of the reverse mortgage loan, your home insurance, property taxes, and required maintenance, how can you possibly come out ahead?  The answer is, you can’t – unless the housing market in your area is so hot (or is hot at the time the loan needs paid back).  Can you ever be sure of the housing market?  This is not something I would want to gamble my largest asset on at any age.  But if you do take the gamble, the lender will profit handsomely up front – and that’s really what’s driving this whole push on reverse mortgages.

So before being tempted by a reverse mortgage, please consider that you would likely be far better off financially, with more peace of mind and with much lower risk, to simply sell your house and rent a nice little downsized house or apartment.  You can take the profit from the sale of your home, bank it or invest it in something low risk and still draw off a nice steady income for much longer.  As we’ve said many times, there is no shame in renting.  And living without debt is so much more peaceful.  That’s what I want in my old age.