Beware of Reverse Mortgages
October 19, 2012One of the hidden nightmares of the financial crisis over the last few years is coming back into the news again. And, I’m hoping that it won’t stay hidden forever. I’m talking about reverse mortgages.
I have never seen a product misrepresented by people selling it as much as I have with reverse mortgages. Do they have a place for some people? Sure. But much like annuities, they are sold in situations that may not always be suitable or appropriate for the consumer.
According to this article, many seniors are now losing their homes in failed reverse mortgage deals. It’s really sad to see someone work very hard to save for a home, buy it, raise a family in it, and then when retirement hits and people should be able to enjoy their “golden years,” a potential life-altering situation can happen if they are sold a reverse mortgage in a way that doesn’t comport with the reality of the housing market.
Can I see situations where reverse mortgages make sense? Yes! If you have a small gap between your income sources and your expenses on a continual basis and a lot of equity in your home, maybe a reverse mortgage would be an option…one of many options! If you need additional income during retirement and have equity in your home and don’t care if the home gets passed down to future generations, a reverse mortgage might be one of your options. So, I am not totally 100% opposed to reverse mortgages, but they should always be evaluated as one of several options. And, if you are pitched a reverse mortgage, make sure that you understand ALL of the provisions of the loan.
Here are some of the dangers of reverse mortgages: many sales people who sell them do not explain them properly. They are paid a hefty commission to sell the product, not always to ensure that you understand what you are buying. It’s unfortunate, but it’s true. This product attracts some sales people who aren’t always willing to put your interests first. The fees on this product can be quite high and often not seen until later on in the mortgage. So, you could end up with a very expensive product that wasn’t explained well and carries substantial risks if you are not very careful. Hidden costs, hidden fees, and the requirement to maintain the property and continue to pay property taxes can all add up to a very substantial financial burden that retirees cannot continue to meet over the course of time.
If you are considering a reverse mortgage, what should you consider? Make sure you understand EXACTLY what you are getting into. Understand the big picture and then dig into the details. What is the term of the loan? What is the interest rate? Who gets the interest payments? What happens if I live to be 120 years old because interest will have many decades of accrual at that point? If you own the property jointly, what happens at the first death? The second death? What is the worst possible thing that your lender can envision happening and do you view that event as likely or unlikely? Under precisely what circumstances could I lose my house? What are the fees and when are they paid? If you get solid answers to all of these questions, you will go in with eyes wide open. From there, you can evaluate the offer on its merits and be able to compare it to other options like a home equity line of credit or downsizing out of your existing home.
Before you commit to a reverse mortgage, be sure to talk to other financial professionals about other ways to tap into the equity in your home or increase the income from your investments. There are often other, less risky, ways to accomplish the same goals without the risk. Sometimes, though, a reverse mortgage may be just the right fit. It won’t happen often, but it’s possible!