Is a Reverse Mortgage Right for Me?

March 03, 2011

It seems that every retirement planning workshop I do lately, this question rears its head.  Used to be not too long ago many people didn’t know what a reverse mortgage even was (Quick definition of a Reverse Mortgage: A special type of home equity loan for persons 62 and older.  The loan proceeds can be in the form of a lump sum, cash advance, or a line of credit.  The loan does not usually have to be repaid during the homeowner’s lifetime, which is why it is often used by retirees.)  Now that people are aware of this investment product, it has suddenly started becoming a first choice answer to retirement security for some people.

Now let me preface this blog by first answering another question, is this a solution for some people?  Yes, BUT is it for everyone?  Absolutely not!  And if I may be so bold, in general this product should only be used if all other avenues for retirement income have been exhausted.

Now what do I mean by other alternatives?  Many people will do the math to see if the income generated from retirement accounts and social security will be enough, but if you (or someone you know) is considering a reverse mortgage you will also want to consider some of these things first:

Downsizing. Selling your home and moving into a smaller home or condominium may allow you to tap into the equity you have earned over the years.

Moving to a less expensive area. This ties into downsizing but takes it a step further in that your dollars can go much farther.

Taking on a boarder. Often there might be an open room available in your home and having extra rent money coming in may be just enough to bridge your financial gap.  (On a side note, my wife and I currently do this and the extra cash sure does help!)

Utilize the cash value in your life insurance policy. By taking a loan against the cash value, you can actually get tax free dollars (as the loan will be paid back, principal and interest, from the death benefit).  Again, this may be enough to, at the very least, delay the use of a reverse mortgage.

Bottom line, reverse mortgage should be your last resort choice.  Why is that? Some things to consider:

  • Because the equity in your home is tapped into, there may be little or none left for your beneficiaries.  Think how this plays into your estate planning wishes.
  • You are still responsible for insurance, property taxes, utility payments, etc. Missing property tax payments for example could cause your loan to become due and payable.
  • Fees.  Reverse mortgages are not cheap!  Origination fees alone can get as high as $6000.  Add that into the other numerous fees such as mortgage premium insurance and servicing fees while you have the loan and all of a sudden that easy access to cash has some pretty pricey strings attached.
  • Amount owed grows over time.  Interest is charged on your outstanding balance each month so your total indebtedness grows.

So who might benefit from a reverse mortgage?

  • Someone who has no other alternatives and minimal assets.  Think of it as the choice of last resort.
  • There is no one that will inherit the home, so any beneficiary issues are non-existent.

I should also point out that unfortunately there are people who seek to get more money from you than is necessary.  Some things to be wary about are:

  • Add-on investments.  Do you necessarily need to purchase an annuity or other product along with your reverse mortgage?  Anyone who tries to push another product on you by saying you have to have it to get the reverse mortgage is generally just trying to increase his/her personal income stream.
  • Home improvement projects as a lead in.  Replacing a roof can be expensive and an “easy” way to finance such a product might be using a reverse mortgage.  Remember our theme?  Exhaust all alternatives first.

I’ll grant this is a touchy subject for many (also those that sell the product!) but hopefully this will shed a little bit of light on this product.  In the end it is about understanding why you would consider it, the total costs of it and if have you really exhausted all other alternatives.  If you can answer yes, then this may be an answer to bridging your retirement income/expense gap.