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Reverse mortgages have been around
since 1989, but they are rapidly gaining in popularity. The
complexity of reverse mortgages makes it difficult for the average
senior to separate myth from reality. Let me help you decide if one
is right for you.
I believe that the reverse mortgage can work effectively for seniors
in the right situation. I’m also concerned that they are being
heavily promoted to seniors who shouldn’t be using them. Last week,
I explained the ins and outs of interest-only mortgages and how they
can be a valuable tool for some seniors. I also warned readers
against the option-ARM mortgage. Those articles can be found at
www.guardingyourwealth.com.
The number of reverse mortgage originations doubled between 2003 and
2004. These numbers may continue to double each year. The media is
filled with sales pitches for these mortgages, promising easy money
and painless solutions to senior’s financial problems.
You must be at least 62-years old to get a reverse mortgage. They
are designed to help financially strapped seniors meet their living
expenses and to stay in their home. A reverse mortgage allows the
homeowner to tap into their home equity without having to make
monthly payments. So it can increase the money available for
expenses without adding to those expenses.
Reverse mortgages allow you to receive money in several ways. The
most popular is the equity line of credit. This way you only borrow
money as you need it. You can also receive a lump sum or fixed
monthly checks for the rest of your life, much like an annuity or
pension. You can even receive a combination of these options. The
amount you receive depends on your age, the value of your home and
even the area in which you live.
A reverse mortgage is still a loan, but it’s not paid back until the
last mortgage holder dies, your home is sold or it’s left unoccupied
for 1 year. If you and your spouse go into a nursing home and don’t
occupy the home for 1 year, then the loan becomes due and your house
must be sold. You (or your heirs) would receive any money left over
after the reverse mortgage is paid. If the house sold for less than
the loan amount, the lender would have to eat the loss.
Lenders won’t allow you to borrow the full value of your home.
Depending on the program and other variables, you may only be able
to access 60% of your home equity. It can be far less than that.
Fees can be very high and options can vary widely from one provider
to the next, so making accurate comparisons between providers can be
very difficult.
I believe that a reverse mortgage can work well for seniors who have
a limited income and wouldn’t otherwise be able to make it without
tapping into their home equity. A reverse mortgage can be a low-risk
way for seniors to remain in their home for the rest of their lives.
That’s why HUD created reverse mortgages in the first place, to help
cash-strapped seniors stay out of poverty without losing their
homes.
A reverse mortgage shouldn’t be used, though, until the money in
Certificates of Deposit and other investments is already gone. A
reverse mortgage should be the source of last resort.
That’s certainly not the message you get from reverse mortgage
providers. They show middle class seniors now free to travel or buy
that nice new car. Too often, seniors are being enticed into these
mortgages by the idea of it being ‘free’ money. It isn’t. If you
spend your home equity now on non-essential purchases, you won’t
have access to that money later should you really need it.
I think a reverse mortgage is wrong for those being tempted to live
beyond their means. Even worse is when financial advisors encourage
proceeds from a reverse mortgage be used for other investments, such
as equity indexed annuities.
Be very hesitant if you are approached by a mortgage broker by
phone, seminar or mail. Remember, using money from your home isn’t
‘free’ money. Spending it is no different then spending money in a
CD or taking your principle out of a mutual fund.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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