Don’t reverse the curse

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DAMON CARR

 

Ok, I’ll admit the title is somewhat exaggerated. My second choice was “I would never recommend a reverse mortgage to my grandmother.” I think you know where I’m going with this article. I’m not a fan of reverse mortgages. In fact, I despise them. Before I go into the details as to why, let me ask you a question? If you had an opportunity to get a loan and didn’t have to make a payment during your life, would you consider it? If you answered yes, you’re easy bait for a reverse mortgage.

What is a reverse mortgage? A reverse mortgage is a loan against your home that requires no repayment as long as you live in the home. Unlike a traditional mortgage where you make regular monthly payments, a reverse mortgage provides regular payments to you. Payments can be made to you in one of four ways—lump sum payment at closing, regular monthly payments over a specified period of time, a line of credit where you can access money when you need it up to a limit or a combination of the three. You’re not required to repay the loan until either the last surviving borrower dies, sells the home, or permanently move away. A lender can also force you to repay the loan if you fail to pay property taxes, homeowner insurance or if you fail to properly maintain the home. In order to get a reverse mortgage a few things are mandatory:

* Homeowner has to be 62 years old or older

* The home has to be your primary residence

* You must have substantial equity in the home—either no debt or debt must be small enough to be paid off with loan proceeds

As long as you meet those requirements, you’ll qualify for a reverse mortgage. They don’t verify your income, credit or other assets such as savings and investments. Reverse mortgages are generally given to elderly homeowners who are struggling to make ends meet and desires to “age in place”. In other words they would like to live out the rest of their days in their home but for one reason (expense) or another, they’re having a hard time paying the bills, living their desired lifestyle and maintaining their home.

Why do I, a mortgage and personal finance expert, despise reverse mortgages? I’m glad you asked. For starters, reverse mortgages are extremely expensive. The interest rates on reverse mortgages are usually adjustable. As prevailing interest rates rise, you’ll realize less income from the reverse mortgage. The fees, interest rates, and mortgage insurance associated with reverse mortgages is extremely high when compared to fees, interest rates, and mortgage insurance associated with traditional mortgages. Secondly, reverse mortgages overshadow the heart of the financial problem—living above one’s means. No one regardless of their income can survive long-term financially living above his or her means. At some point, you’ll be forced to live within the confines of your income. I advise you to face the music now as oppose to delaying the inevitable. Should you delay, you’ll more than likely have a similar income with a larger debt balance to payoff. Lastly, reverse mortgages destroy the wealth (equity) you’ve worked hard all of your life to build. That’s why reverse mortgages are called rising debt, falling equity loans. As a financial advisor, I feel it’s responsible that I give ideas on how to build and preserve wealth, not erode wealth.

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