If you watch any TV, you can’t help but have noticed the ads for reverse mortgages. This is one of the retirement schemes that has gained a lot of interest recently. On the surface, if you’re to believe the celebrity endorsements, it sounds like a good deal for retirees 62 and older because it can turn your home equity into income. So, instead of you making mortgage payments to the bank, the bank pays you.
Of course, as they say, the devil’s in the details, and when you look at the details a different picture emerges.
For starters, reverse mortgages are not mortgages, but loans against your home’s equity; loans that eventually have to be repaid. Here are the things the ads don’t tell you.
- It’s a loan, like I just said, and the fees related to getting it, such as origination and other fees, are often higher than normal loans, or even home equity loans. The origination fee can be as high as $6,000, and that’s on top of title, appraisal and closing fees.
- Because reverse mortgage lenders take more risk on this type of transaction, interest rates are high, averaging 3 to 5 percent plus 1.5% mortgage insurance premium. As long as one of the mortgage holders is living in the house, no repayment has to be made, but the annual interest continues to accrue until the loan is repaid, so depending upon how long you take to repay, you could end up paying back more than the house is worth.
- You have to repay the loan in full when you move out of the house or die, or it will be foreclosed and sold. Your heirs won’t be responsible for nonpayment of the loan, but this could make it impossible for you to leave the house to them in your will.
- You are considered to have ‘moved out’ of the home if you’re absent for a year. This includes living in a long-term care facility.
- If your heirs want the house after you die, they must repay the loan in full; in effect, they must ‘buy’ your house.
- Even though you aren’t making mortgage payments, you’re still responsible for property taxes, maintenance, and homeowner’s insurance. If you fail to pay these expenses, the lender can foreclose on you.
So, before you take the plunge and sign up for a reverse mortgage, think long and hard about it. The high fees will come out of whatever amount you’re qualified for, which greatly reduces the amount you actually get. You have a choice of a lump sum, periodic payments, or a line of credit. The lump sum will probably be subject to state and federal taxes as well, so just at a time when your expenses should be low, you’ll be taking on a massive debt burden and you just might get a whopping tax bill on top of all that. If your health declines, and it’s no longer possible for you to stay in your house, but you don’t have the resources to repay the loan, you will lose, and there’s a strong possibility that you won’t be able to leave it to your children or grandchildren.
The ads sound so sincere, but, unfortunately, they’re not telling you the whole story. Reverse mortgages are truly a case of caveat emptor.
Published by Charles Ray