Should I Take Out A Reverse Mortgage On My House?

900378675.jpgMy brother mentioned setting my mother up with a reverse mortgage over the holiday break, so I thought I would do some research on what is was and if it was a good idea. I had heard of it before and I have a basic understanding of it, but I figured there had to be some sort of catch, as there always is, and there certainly are…

“The HECM FHA insured reverse mortgage can be used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home. The loan, commonly known as HECM, is funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. To assist the homeowner in making an informed decision of whether this program meets their needs, they are required to receive consumer education and counseling by a HUD-approved HECM counselor

1. You need to be under the 62 year old age limit.
2. You need to own your property outright.
3. The house you’re reverse mortgaging needs to be your primary residence.
4. Needs to be a single family home, a 1-4 unit home, a manufactured home, or leased land; ( this just means that when they take your equity in your house out from under you, they need to have a good house to steal, who wants to steal a dump? 🙂
5. Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. A reverse mortgage can cost thousands more than a conventional mortgage.
6. It’s important to calculate the cost of a reverse mortgage against what you would gain, because once you enter a reverse mortgage agreement, the mortgage company essentially OWNS your home.
7. Reverse mortgages are often seen as a last resort if the homeowner needs cash and there are no other options. (Take this one the most seriously! Not only are you getting rid of the possible last piece of ground a person may own, but you’re betting their home on it.
8. What if you outlive your reverse-mortgage? I couldn’t find anything on this, but it is a valid point. What if you USE you last resort, and then you outlive it? I’d assume the bank then owns your house and kicks you out to go live elsewhere; which isn’t fun at 85 I bet.
9. To reduce their risk, lenders generally limit reverse mortgage loans to amounts that are below their estimate of the property’s full value; meaning that you’re going to get a lesser amount than your house is worth in the first place FURTHERING the idea that this should be a last resort.

Andrew Linden from Australia thinks they should be BANNED.

?Associate professor of economics at the University of Western Sydney Steve Keen, author of Debt Watch, calls them ”the most dangerous ‘innovation’ around in finance” and says any decline in house prices will see lenders and investors bearing significant risk of possible losses.

“I want them abolished. [They represent] a systemic danger to the banking system. [With reverse mortgages] the banks are building in an expectation of continued asset price inflation for the next 25 years,” Keen says.”

Can it work?  Yea, I suppose it can.  It sounds like most of the people don’t even qualify for them in the first place.  Some people just don’t find themselves in the right position to act on it in the first place after drudging through the pre-reqs.  Bottom line as with any investment, RESEARCH your options.  If it IS your last option, REALIZE that it is, and take the proper steps.  Bring along a trusted friend or family member to the consultation.  Most of us look at the reverse mortgage as a detriment to society and squeezing of our senior citizens, but really the lenders are just targeting another audience.  It may not be right for everyone, but to the select few that it is right for, the lenders have a right to advertise to them.

If you’re reading this blog and under the age of 50, well, you’re probably on the right path anyway if you’ve got a plan, at least educating yourself to get a better understanding of what is to come so you won’t make more bad decisions.  It is likely we won’t have to worry about that for ourselves, but if we have parents or loved ones that ARE in that situation, at least you’ll be able to answer/help them answer many of the questions that come up in the lending process.  Keep your eyes peeled and guard up and decide for yourself if it is a good decision.  Prepared financial decisions are usually the best kind to make…

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  • Hank, reverse mortgages really are a last resort type option, especially when the elderly have kids to help make life a little easier.

    Unfortunately, I think the trend is going to continue because most people did not save enough to take advantage of the wonderful advances from the past fifty years or so. Most people saved like it was the 1800s and they were just going to buy food in their final years. However, they still want to have all of the expensive, modern conveniences…

    Even our own state has embraced this trend and is now preying on the middle class and the elderly via excessive property taxes. Last fall WA state voted to create a program where you can delay your property taxes until you sell or die, instead of reducing the tax to a more reasonable and manageable level!

  • Hey Aaron – Yea, that’s what I’ve found also; my mother has enough FAMILY that she should be alright. Unfortunately I can see it from the other side of the coin too in the fact that some people just don’t have the family, nor the family FUNDS to put off the “last resort type of option.” It’s sad, but true… Thanks for the post.

  • Jim

    Andrew, I don’t know how it is in Australia but in the United States reverse mortgages are available for homeowners 62 and older and in a lot of cases is not the last resort to financial independence.
    With a reverse mortgage in United States you cannot outlive your entitlement, you maintain ownership of your home and you cannot be evicted. Only the Big Guy can do that. Now if you fail to pay your taxes, that’s a different story and it won’t be the reverse mortgage that puts you out of your home. The reverse mortgage was designed for seniors to age place.
    The reverse mortgages a tool that can be used for many circumstances.
    They have been used to pay off existing forward mortgages to stop that monthly payment and make life a little easier.
    They have stop the foreclosure procedure.
    They have been used to set up credit lines that are used for health reasons, home repair and fix up, buy a new-car, take a vacation.
    There is no repayment on a reverse mortgage until you either sell your home, it is no longer your primary residence for 12 months or more, as in going into a nursing home, or you pass away.
    As I said before if you don’t pay your taxes it won’t be the reverse mortgage coming after you, so as long as you pay your insurance pay your taxes you stay in your home till death do you part.
    In all the years that I’ve been doing reverse mortgages I’ve only had a few people ask me about a repayment plan, there is none. The loan can be repaid at any time though. The reverse mortgage does not require payments to be made. The payments come to the senior not from the senior. That is the beauty of the reverse mortgage, the home that they have paid into over the years can now pay them back in their retirement. This turns the home into a performing asset rather than a nonperforming asset.
    I have done reverse mortgages for people that have a large existing mortgage to be paid, and at times have had customers come to the table with money in addition to the reverse mortgage funds to pay off the mortgage and not have any more payments. This gives them the extra income needed to make their lives more enjoyable in their retirement. They no longer have a house payment.
    When I do reverse mortgages I always recommend the credit line method of payment. The advantages are, the money is available when needed, and there’s no interest charged on the money that is not used. FHA also gives them a growth rate on the money left in the credit line. The credit line growth rate is like interest but is nontaxable.
    Hope this clears up a few things.

    Reverse Mortgages information

  • @Jim – Andrew is the guy that wrote that piece, my name is Hank and I actually live in the US, just quoting an Australian post. 🙂

    Thanks for the comment! much appreciated, but at the same time, don’t you think there are better ways to invest a seniors money? I understand it is a way to take out a piece of the pie they’ve already invested, but do most people come to you because they’re running into their last options? What else do they invest in at the same time as their reverse mortgage?

  • Hank, Jim brings up all the benefits of a reverse mortgage. The biggest downside for the senior is the fact that their estate for their heirs will be smaller than they hoped.

    Most people choosing a reverse mortgage is because the senior needs to tap the equity in the largest asset that they have. I had one client that needed to do a reverse mortgage so that he could pay for daily nursing. He didn’t want to sell his home and then move into a nursing home. This was a lifestyle choice he made.

    Remember too that not everyone qualifies for these types of loans. If you have a lot of debt on the property now the likelihood of a reverse mortgage working for you is not that great.

    It’s a good solution for the right person.