by Damon Carr
For New Pittsburgh Courier
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 moves away. A lender can also force you to repay the loan if you fail to pay property taxes, homeowner’s 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 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 desire 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 opposed to delaying the inevitable. Should you delay, you’ll more than likely have a similar income with a larger debt balance to pay off. 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.
With reverse mortgages, your debt grows larger and larger as you continue to receive cash advances, make no payments and the interest continues to grow on the loan balance. This concept goes against all principles of building wealth and smart asset management. You want to get compounding interest working for you, not against you.
I can read your mind. You get my point but you’re still looking for viable alternatives to live on your terms during your retirement years: Here are a few:
Sale-leaseback: You can sell the house to an investor or family member and then rent it back from them under a lifetime lease. You have the advantage of taking the proceeds from the sale of your home, investing it wisely and using it to supplement your income while you remain in a comfortable, familiar surrounding.
Home-sharing arrangement: This is a fancy way of saying “get a roommate to help you with the bills.” In return, you’re able to remain independent and continue to reside in your home. As a side benefit, this arrangement can provide friendship and companionship.
Sell the house and rent in a nearby neighborhood: It’s very possible that as a senior person, the house may be difficult to maintain both financially and physically. I know that it’s difficult to leave the happy memories behind. I also know that it’s difficult to remember the happy days of the past, when you’re stressed in the present trying to financially support and physically upkeep the house. Why not sell the house, rent something nearby that’s not as expensive and doesn’t require you to mow the lawn, shovel the snow, etc. With reduced expenses and the proceeds from the sale of your home supplementing your income, you’ll be better off financially, physically, and emotionally.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)