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Last week's article on reverse mortgages generated a very
interesting response from one reader. Unfortunately, due to his
choice of vocabulary, I can't print his response here. Suffice it to
say that this advisor doesn't want me saying anything negative about
his chief source of revenue. This week I'd like to pull back the curtain on the real reason reverse mortgages have become so heavily
marketed and what you need to do as a consumer to protect yourself.
In my previous article, I mentioned an elderly couple from Florida
who were considering a reverse mortgage as the answer to their
financial crisis. Over the course of a year, they attended two
different seminars presented by their bank. This couple was living
beyond their means and saw tapping their home equity as a way to
keep making credit card payments. A reverse mortgage would have
given them access to a $38,000 line of credit, but would have cost
them almost half that much in fees.
Fortunately, they shared their plans with their son. They were
scheduled to sign the papers in a week. That's when he called me. He
gave them my advice and took the time to help them look at all the
options available. More on their decision later; the issue I really
want to explore is why are conservative banking institutions and
mortgage brokers pushing these mortgages so heavily?
The answer is simple and obvious: the collapse of the housing
bubble. Home values are declining, credit is drying up, and fewer
homes are being bought or sold. Mortgage departments are a huge
source of revenue for a bank. Over the last 5 years, the mortgage
department has been generating huge profits. Suddenly, that has all
changed.
Enter the reverse mortgage. These have been available for some time,
but when a loan officer was so busy writing traditional mortgages,
there wasn't a reason to focus on them. With some spare time on
their hands, mortgage brokers need to find a way to feed their
families. And from their point of view, the reverse mortgage is the
perfect product for a variety of reasons.
For one thing, reverse mortgages are government guaranteed so the
bank doesn't have to worry about losing money in a foreclosure. This
is especially important when home values have plummeted 10% or more.
In other words, there is very little risk for the bank.
It also helps that the fees on reverse mortgages are amazingly high.
That means that the mortgage brokers, if they are successful pushing
reverse mortgages, can continue to make money. The bank likes it
because the mortgage department continues to add to the bottom line.
A third reason why reverse mortgages are so popular is because the
market for them is far larger than the traditional mortgage market.
Most people only buy/sell a home every 5-10 years. Think of how many
seniors are sitting in homes with huge amounts of equity! Instead of
chasing a limited market of home buyers who can afford large down
payments, mortgage brokers can tap a larger, ever expanding senior
market.
It isn't that banks and brokers shouldn't make money. They should.
My primary concern isn't the bank, though. It is you. I want you to
understand the motivations of those involved. You should research
any large financial decision you make. Get all the facts so you can
make an informed decision. It's the same when considering a reverse
mortgage.
There are certain situations when a reverse mortgage can make sense,
but I expect that there are many, many reverse mortgages done in
situations where there were better alternatives. It was never
intended as an easy way to pay for dream vacations.
What about my friend's elderly parents? Given all the facts, they
chose credit counseling instead. They consolidated their credit card
debt while reducing their interest rates. They also decided to sell
their home and use their equity to relocate closer to family.
Besides leaving a hurricane zone, they'll be moving to a more
temperate climate with a much lower cost of living.
Don't blindly fall for the reverse mortgage sales pitch. Explore all
the options and make sure youâre making the choice that is best for
you. I also suggest you get your children involved as well. You
could just sell the house and move in with them (just kidding)!
Nationally-syndicated financial columnist and Certified Financial
Planner(R) Jeffrey Voudrie provides personal, in-depth money
management services and advice to select private clients throughout
the USA. |
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