Reverse Mortgage Dos and Don’ts
Family Matters: Financial Life: What seniors should know.
Reverse mortgages are being heavily advertised to seniors by some familiar faces, including Henry Winkler — better known as "The Fonz" — and former senator and actor Fred Thompson.
While this particular financial product may be good for banks’ bottom lines, it may not be good for yours. It’s important that seniors understand the facts — and the myths — about reverse mortgages so they can make informed decisions before signing on the dotted line.
What is a reverse mortgage (also known as a home equity conversion mortgage)?
It is a loan that allows one to access equity in his or her home and is available for seniors at least 62 years old who occupy the property as their principal residence. It’s important to recognize that it is a loan, and a relatively expensive form of loan at that. There are high upfront and ongoing costs, and while it may make sense in limited circumstances, it’s good to keep in mind what we read in Proverbs 21:20: "Precious treasure remains in a wise man’s dwelling, but a foolish man devours it."
What are the most significant myths about reverse mortgages? The first is that a reverse mortgage never needs to be paid back. While it’s true that it doesn’t need to be paid back while one remains in the home and all other conditions of the loan are met, the loan will eventually need to be paid off. Payoff typically occurs through proceeds from the sale of the home when the occupant moves out or dies. Seniors need to recognize that a reverse mortgage will reduce their ability to pass the home or its equivalent value down to their children.
Another myth is that reverse mortgages can never be greater than the value of the home. Since interest accrues on the mortgage balance, it is possible for the loan value to exceed the value of the home. While most reverse-mortgage contracts are non-recourse, if one desires to keep the house in the family, any excess will need to be made up by heirs.
There are also misperceptions that reverse mortgages always provide lifetime income and that one can never lose a home. While one option is to receive payments for the remainder of one’s life, that depends on compliance with the terms of the loan, including occupying the home as one’s principal residence. In addition, failure to pay property taxes and mortgage-insurance premiums can cause the home to be lost to foreclosure.
Does it ever make sense to take out a reverse mortgage? In very limited circumstances. If you have concluded that you want to stay in your home for your later years, don’t have other resources to provide for your living expenses, and don’t expect to make the home or its value part of an inheritance to your children, it can make sense to use a reverse mortgage. Before doing so, make sure to consider alternatives, including an intra-family loan, sale and leaseback or selling and downsizing.
Finally, if you do utilize a reverse mortgage, I would be very cautious about taking payment in the form of a lump sum or line of credit. Receiving such a windfall may lead to irresponsible short-term spending that chews up the available asset and leaves one destitute in one’s dependent years. God love you!
Phil Lenahan is president of Veritas Financial Ministries (VeritasFinancialMinistries.com) and author of
7 Steps to Becoming Financially Free: A Catholic Small Group Study (OSV) and Generation Next: A Catholic Guide to Financial Freedom for Young Adults.