09 Jan Is a Reverse Mortgage for You?
In 2007, a reported 107,000 reverse mortgages were made in the United States with double that number predicted for 2008. As the housing market slows, the demand for reverse mortgages may dramatically increase. The term “reverse mortgage” sounds like it is the opposite of a regular mortgage in that the lender gives you money after you already own your home, but that is only partially true. Like any mortgage, the money that is loaned has to be repaid.
The main difference is when the money has to be paid back. Instead of making monthly payments, payment in full is due only after you die or the home is sold. The money can come from the lender in a number of ways. It can be taken lump sum, in regular monthly payments, or accessed only when necessary. However, the money borrowed bears interest just like any loan, so you are essentially spending the equity in your home. And there are closing costs that must be paid, so you are adding that cost to the loan with interest over time.
To qualify for a reverse mortgage, you need to own your home with sufficient equity to cover the loan and you must continue to maintain that structure in good condition so it is not at risk of losing value. While there are legitimate reasons to take a reverse mortgage, this is an opportunity for unscrupulous lenders to take advantage of unsuspecting, and typically elderly, consumers. Recently, ABC’s Good Morning America ran a piece stressing the advantages of taking a reverse mortgage. It is important to consider the risks as well.
The downside is that you are spending the equity in your home, your are incurring huge costs and interest in favor of getting some money today, and you could be placing your home in risk of loss even though the lender may advertise otherwise. Finally, on a lesser point, the reverse mortgage will reduce the value of your assets to be passed on to your heirs. I joke with my son that I am going to spend his inheritance before I die, but a reverse mortgage will assure that hard earned wealth is not passed onto future generations. When the numbers are added up, it is usually better to sell the home and take the cash to live a better life without the headache of maintaining repairs on a house.