I recently read an article in Investopedia entitled “5 Signs a Reverse Mortgage Is a Bad Idea” and I thought I might learn something new about reverse mortgages. All I saw was a “glass half full” explanation of them. Let’s be honest, every financial tool is not perfect for every situation, and if you are over 62, you may be considering a reverse mortgage, so let me tell you what I think about them. Then, read other opinions and decide for yourself.
What is a reverse mortgage? Let’s start with what is a mortgage? (just in case). If you are clear what a mortgage is, skip to the next paragraph. A Mortgage (called a Deed of Trust in some states) is a loan, secured by real estate, and they were really made popular after the Great Depression when the time to repay was stretched from 5 years to 30 years. That’s right, many years ago, if you could not pay off your house in 5 years you couldn’t buy one, and the Federal Government stepped in to create the 30 year mortgage in order to increase homeownership. When you buy a home, most people borrow most of the money and the repayment is usually spread out over 30 years. We won’t get too deep into amortized interest here, so suffice it to say that for the first several years, most of your payment goes to pay interest, and a small portion goes to pay down the amount you need to repay (principal). Usually, your real estate taxes and homeowner’s insurance are also bundled into that payment. You also might pay a fee called Mortgage Insurance, which is essentially an insurance policy in case you can’t pay your mortgage and they need to begin collection proceedings. Yes, they can take your home away if you do not pay your mortgage (that’s fair, right?).
So, what is a reverse mortgage? Well, it’s a mortgage that works in reverse… With a mortgage, you start with a high balance, and pay it down. If you stay in mortgage for the full 30 year term and never make extra payments, at the end of the term, you no longer owe a mortgage payment (you still owe real estate taxes and homeowner’s insurance). In a reverse mortgage, you start with a low loan balance (as low as zero if you have paid your house off already) and your balance increases as you receive money. You must start with at least 50% equity, so if your home is worth $400,000 and you owe less than $200,000, you have enough equity. You could also use a reverse mortgage to buy a $400,000 home with a $200,000 down payment and, because the house is going to pay you, you do not need to have good credit or income.
What? Why would I receive money from my house? That sounds like a scam to me!
Based on my conversations with people, there are 4 primary reasons people don’t get a reverse mortgage when they should, and the above reason is
#1. People think it must be a scam, so let me explain why a bank would send you money. Remember, the loan is secured by real estate, and banks are just investors who are in business to make money by loaning it out. And if you remember that you must be 62 or older to obtain a reverse mortgage, then you’ll realize that you are closer to the end of your life than the beginning, and reverse mortgage is only valid while you are alive and living in the home. When you die, the bank loan must be paid off. The 2 most common ways this happens is that your heirs pay off the loan by getting a new mortgage, or they sell the property. If there is any money left over after selling it, the heirs get to keep it. However (and this is pretty cool) if there is not enough money from the sale to pay off the loan, your heirs do not owe the difference. Now you can see, it makes business sense for a bank to offer a reverse mortgage.
#2 (THIS IS FALSE) People think the bank will eventually foreclose on me and kick me out! As long as you are alive and living in the home, the bank cannot take it away from you. The worst thing they can do is stop sending you money if they have sent you the maximum they originally agreed upon, and very often, by the time they have sent you that amount of money, the home has gone up substantially in value, however it is possible that you stop receiving money. In fact, if you really beat the odds and live to a healthy 150 years old, the bank will just have to wait until you die (or voluntarily move), in order to get the mortgage paid back. Of course, interest will continue to accrue, but remember, your heirs do not owe the difference if the sale does not bring in enough to pay what is owed.
What if you are still alive and want to move? Just like any home you own with a mortgage, sell the home, pay off the mortgage, and move. No problem. Which brings me to reason
#3. There are high upfront fees to get a reverse mortgage. Now these high fees, spread out over many years, seem reasonable to me. And let’s be honest, when I die, I can’t take the rest of the money with me, so personally, I am ok with spending that money today to not have a house payment in my later years and create some additional income. Which brings me to reason
#4 If you get reverse mortgage, you are spending your children’s inheritance (or at least some of it). This is a true statement! The more you spend while you’re alive, the less your heirs will receive when you are gone. So here is how I view this; when you’re gone, (depending on what you believe) you will not get to watch them spend it anyway, so if you want them to enjoy your money, why not have them enjoy it with you? Get the reverse mortgage and use the money to spend your last years creating wonderful memories with the ones you love! Also, as a parent, I believe it is my job to teach my children the life skills they need to surpass my accomplishments, not to just leave them a pile of money when I am gone.
I am not 62 yet, and at some point, after I turn 62, I fully intend to get a reverse mortgage. I have paid into my home for years and I will feel good when it pays me back.
To be clear, there are legitimate reverse mortgages and there are certainly reverse mortgage scams out there too, so if you want to talk to a reputable reverse mortgage lender, just let me know and I will be happy to recommend someone, after all I’m Jeff Howard – you’re Realtor for life.
Do you have a need for commercial / industrial / retail buildings or land? Are you ready to buy or sell a home? Do you want 3 cash offers? We can help you with all of that… just call us at 702 SELL NOW or click on this link to my website http://www.702SellNow.com
Choose to have an amazing day….Jeff