Reverse Mortgages: They’re At It Again

“The Good, the Bad, and the Ugly” is more than a movie title. It serves to describe most of the various mortgage products on the market. For several years I’ve been warning my audiences about the horrible mortgage products that glutted the market until the Great Meltdown of 2008.

I have always been a fan of 15-year fixed rate mortgages (The Good). Adjustable rate mortgages were The Bad. Then, came the interest-only loans—my idea of The Ugly.

But that was then, and this is now. Today we’re hearing more and more about something called the reverse mortgage. What is it, and where does it fall on “The Good, the Bad, and the Ugly” spectrum? Well, that’s a bit hard to say because reverse mortgages are in a class all their own. They can be good—but, often, they prove to be a huge mistake.

Here are some generalities. Most reverse mortgages are for people 62 and better. They effectively lend against a home’s equity and don’t have to be repaid until the owner dies or sells. There are private programs, but the best known is the FHA plan called the Home Equity Conversion Mortgage (HECM.) The amount you can borrow depends primarily on the value of your home, the equity you hold in it, interest rates, and your age. The older you are, the more you can borrow. So far, so good. But this is where these things get a bit more confusing.

Reverse mortgages can make sense for a well-informed senior who determines that he or she (approximately 45% of reverse mortgages are made by single females) needs the income source to offset retirement expenses or to help with medical bills.

But, too many people are using these programs to turn dollars into dimes. Let me share a few of the deep, dark, dangerous pitfalls of reverse mortgages.

1. Reverse mortgages tend to be costly. By the time you add up the FHA fee, mortgage insurance premium, appraisals, and other costs, many of these loans have fees that exceed 6%. If you absolutely must borrow, consider a cheaper home equity loan. For some people this may a better alternative.

2. We baby boomers have never been known for our ability to defer gratification. Reverse mortgages are proving that we haven’t changed. This year, the first boomers will turn 63. More and more of the coddled generation are doing typically stupid things with their proceeds from reverse mortgages like buying second homes, paying off credit card bills, and taking cruises. Sin can be forgiven, but stupid is forever.

3. Many seniors (and boomers, too) are being targeted by high-pressure life insurance annuity salesmen trying to get us to buy reverse mortgages and, then use the money to purchase deferred annuities. Look out! Experts warn that deferred annuities make great commissions for their pitchmen—but are rarely good for the seniors buying them. They can tie up retirement savings beyond one’s life expectancy.

Like almost everything else, reverse mortgages are a bit like chameleons.

Depending on your line-of-sight, their appearance can change before your very eyes. Before you sign your name to the right side of the “X”—research, research, research! And remember that God is very interested in your well-being in the later years. I love the Proverb that says, “The wealth of the rich is their fortified city, but poverty is the ruin of the poor” (10:15).

 

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