Is a Reverse Mortgage Annuity a Good Deal?

by Neal Frankle, CFP ®

If you are looking for some extra retirement income, you’re probably intrigued by the idea of a reverse mortgage annuity. It’s a way for you to tap into the equity of your home. You’ll receive that money for as long as you’re able to live in your home, and you won’t have to repay the loan. Because of the growing number of people turning 65 every day (currently 10,000), you’re going to hear a lot about reverse mortgages as a way for people to augment their retirement income. Since many people aren’t able to find jobs in retirement, or aren’t interested in it, this could be a way to go.

When you sign up for a reverse mortgage, you get either a lump sum or, in the case of a reverse mortgage annuity, a stream of payments you can’t outlive. So far, so sweet. The money you receive is determined by:

a. the equity in your home
b. the current interest rate
c. your age
d. the equity you have in your home

The higher the prevailing interest rate, the greater the return the bank earns. As a result, they’ll pay you higher rates. The older you are, the fewer years the bank assumes it will have to pay you. As a result, it will pay you more, too. It doesn’t matter if you have a bad credit score. It doesn’t matter what your retirement income is either. You don’t have to make payments, and you don’t have to repay the loan.

The money is paid back when both spouses move out of the house or die. At that point, your beneficiaries can either pay back the loan (by selling the property or by any other means) or allow the bank to sell the house themselves. As you can see, for some people, using a reverse mortgage could be the only way for some to stay in their homes after they retire.

Why wouldn’t you take advantage of a reverse mortgage annuity?

Because it’s very expensive. Origination fees can easily get to $6,000. Closing costs are 2%. And add another 2% for mortgage insurance from the FHA. Taken together, the total cost can be 6 to 10% of the value of the property.

Even the people who sell reverse mortgages admit it. According to Investment News, the CEO of one of the largest reverse mortgage companies says that the reverse mortgage should be the last resort for borrowers.

The bottom line:

For the right person, a reverse mortgage could be a gift from heaven. Equity in your home, if you’re going to continue living in it, doesn’t do you a lot of good if you are short on cash. But even if the idea of a reverse mortgage appeals to you, the longer you wait, the better you’ll do. Interest rates are currently at all-time lows. If you wait until rates go up, you’ll also be older, and you’ll get more money as a result of both.

Have you considered getting a reverse mortgage annuity? What was your decision? Why?

 

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{ 1 comment… read it below or add one }

Choose Financial Freedom September 1, 2011 at 6:18 AM

Yeah, I’d say that it can be a great option for those in need for cash flow.

But I then ask the question: “If you end up taking the equity out your home using a reverse mortgage, then was the strategy of paying it off a bad one?”

Would it have better served the client to have kept the equity separate from the home? Maybe.

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