The Lowdown On Reverse Mortgages

Talk about having your cake and eating it too.

Would you like to get a load of cash for your house but still stay in it and live rent-free?

That’s what reverse mortgages sound like to a lot of people.

But are they as appealing and risk-free as they sound?

“While reverse mortgages are increasingly being used as a tool in retirement planning, they still come with pitfalls that can cause serious problems for unwary borrowers,” cautions  Tom Lauricella of the Wall Street Journal.

We agree with him.  Reverse mortgages are indeed a tool in the financial planning toolbox.  But like chain saws, nail guns, and other sophisticated power tools, they can do a lot of damage when used by the untrained and unsuspecting.

Here’s what you may not know about reverse mortgages:

  • Reverse mortgages are only for homeowners age 62+. If the youngest homeowner is under that age, forget about it.
  • You must have equity in your home (that rules out a lot of people nowadays in heavily underwater states like Florida).  With a reverse mortgage, you are borrowing back the equity you’ve built up over the years.  If you do not have sizable equity in your home, a reverse mortgage will not work.
  • Even with a reverse mortgage, you still have to continue paying the real estate taxes, insurance and maintenance on your home.  If you cannot pay these expenses, you will face foreclosure, so if your budget is really tight, consider other options like an outright home sale. According to the newly formed Consumer Financial Protection Bureau (CFPB), one in ten of all reverse mortgage borrowers is at risk of foreclosure, due to their failure to pay taxes, insurance, and ongoing expenses.
  • If you have equity in your home, and are technically eligible for a reverse mortgage, think first whether selling your home and downsizing wouldn’t be a better option.  That way, you can use the proceeds from your home to generate ongoing income, and have a cushion for emergencies.  Cautions the CFPB in a recent report to Congress, “using a reverse mortgage to hold on to the home for the near term may simply postpone hard decisions, provide little long-term benefit to the borrower, and consume most or all of the borrower’s home equity in the process.”
  • The CFPB warns, in particular, about reverse mortgages taken by a couple when only one spouse is on the title or loan.  Reports Lauricella of the Wall Street Journal, “under the terms of today’s reverse mortgages, the spouse who isn’t on the loan can be evicted when the spouse named on the loan passes away or needs to move into a nursing home.”

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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