If you are retired you are probably sick of having to deal with a higher cost of living and lower returns on your fixed income investments. In that case, a reverse mortgage might look good to you. Indeed, it might make sense in a few cases. But it can introduce you to a world of hurt if you aren’t careful. That’s right. Reverse mortgage risks are much greater than you think. You could lose your home and even be forced to look for work after you retire. Let’s have a closer look.
What are reverse mortgages?
These are agreements you make with financial institutions. They provide you with a loan that gives you access to either monthly income or a large lump sum based on your age, current interest rates and the equity you have in your home. You can get a reverse mortgage if you are 62 or over and own a home (even if you have a mortgage). The beauty is that you don’t have to pay the money back until you die or move out. Sounds good right? Don’t get too giddy just yet.
More and more people who entered these agreements in the past are reporting abuse and fraud to federal and state agencies. While not all of the companies in this business are bad apples, some definitely are. These less than reputable firms sweet talk seniors into taking these loans when they really shouldn’t. Then the seniors find themselves out on the street faster than you can say ,”Son, I’m moving in with you tomorrow.”
What are the biggest dangers associated with these deals?
Neal’s Notes: Recent changes in the law have mitigated some of these risks – but if you are considering going this route, please acquaint yourself with these new regulations first.
Reverse mortgages are super pricey. The company who puts the deal together for you is going to charge you about 8% just for starters. Of course you still have to pay for maintenance, taxes and insurances. If you can’t pay those bills, out you go.
Reverse mortgages call for repayment of the loan once the person on the deed either passes away or moves out of the house. What some of these companies do is try to get the husband’s name on the deed only. They know that men don’t live as long as women. If you fall for this and your husband either passes away or must relocate to a nursing facility, you’ll have to leave too. That’s stinks and it probably wasn’t your understanding when you signed up for the reverse mortgage.
Other Red Flags
Large insurance companies and banks that were in this market are turning tail and getting out. MetLife, Bank of America and Wells Fargo have all closed down their reverse mortgage business. These companies have closed shop because property values have dropped and so has the ability of borrowers to repay the loans. Because these reputable players are gone it left space for some real estate scammers to fill the void.
Some engage in the practices I mentioned above. ( These include recording the reverse mortgage with only one person’s name on the deed or getting the couple to take a lump sum in order to pay off old debts. People who fall into that group often can’t afford to pay for maintenance, tax and insurance and end up losing the home to the reverse mortgage company as a result.)
So what should you do if you have equity in your home but need money?
The answer to this question largely depends on your situation. But if you are retired and are in this situation, I suggest you do one of the following:
- Sell your house and rent. If you live in an expensive area, you may have to move to a place where the cost of living is much lower. This is the option with the least risk to you. You’ll have a lump sum to pay off old debts and possible some money left over to invest for income.
- Rent your house and rent. Again, you may have to move in order to find a place to rent that is suitable and less expensive. This carries with it the headache of being a landlord but if you don’t want to sell right now, it can work.
- Sell your house and buy a much cheaper home. Again, in order for this to work, you may have to consider moving.
These alternatives are not easy fixes. They are painful and I know it. And I’m certain that you’d much prefer to stay in your home if at all possible. But you have to make a decision based on your intellect rather than your emotions.
If you ‘re still keen on the reverse mortgage idea, consider all the costs of homeownership and what it will cost you to live after you take that loan. If you can afford to maintain the home (and if you make sure that both you and your spouse’s names are on the deed) maybe the reverse mortgage will work for you. But project what it’s really going to cost you to live after everything is said and done. If you need to make a more substantial cut in your cost of living, consider using one of the three alternatives I outlined above.
Have you considered taking a reverse mortgage? How do you finally decide? What was most important in your decision?