Recently I had a conversation with my dad around Reverse Mortgages (RM). I’m sure we’ve all seen the television ads touting this as a way to use your equity today as part of your retirement. In very select circumstances, a RM product may make sense but for the most part you’re better off considering a traditional Home Equity loan, getting a roommate or selling your home. For most of us, our homes are a substantial investment. As we think about the future, the equity in our homes provides a level of financial security as well as a place to live. That may sound fairly simple, but it’s true. One thing that none of us want to experience late in life is not having a place to live and a paid-off home can provide that security.
The allure of RM products is that they can provide a way to supplement one’s income via a monthly payment, line-of-credit or lump sum. The way a RM works is that you borrow against a percentage of your existing equity and then each month the interest is added to your “loan balance.” It seems like even a better deal because you don’t have to pay off the loan until you decide to sell, permanently move or your home becomes part of your estate.
Yet, this is when things start to get tricky. Let’s say you need some long-term care and don’t live in your home for a year. Based upon the structure of these loans this qualifies as a “move.” So right when you think you’re going to be OK, you now have triggered a loan pay-off right when you likely have medical bills mounting up in the background. Since none of us know what life will bring, this kind of scenario is a bit daunting.
The fee and interest side of the equation is also something to consider. The upfront fees and interest rates associated with these loans are generally higher than traditional loan products. While the amount of interest you owe builds up over time, the origination fees have to be paid upfront–and there are often “servicing fees” over the life of the loan. Once you tally all this together, and deduct it from your equity you might be surprised how much the bank gets for loaning you your own money.
So when would someone consider a reverse mortgage? Candidly, I think a reverse mortgage should be avoided until one has exhausted all other avenues. In many ways, you will get more equity out of your home if you sell it than if you take advantage of a Reverse Mortgage. If you still feel compelled to consider a RM product, then I would suggest you sit down and run the numbers with an accountant or financial planner you trust. Like with most things in life, it’s all a game of numbers.
It also never hurts to have an attorney review any lender paper work if you have any concerns. A brief, independent review is relatively inexpensive in the scheme of things.
Please always free to call or e-mail me with any mortgage related questions you might have. 214.529.9622