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What Are Reverse Mortgages? And Are They a Good Idea?

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Have you been seeing those ads on TV that promote reverse mortgages? I used to only see them once in a while, but now it seems like every commercial break is mentioning reverse mortgages! What is your reaction to these ads? Do you think they are in the consumer’s best interest or the bank’s? Based on the quantity of ads I have been seeing, I would guess the bank’s (because a bad deal needs to be advertised heavily).

What Are Reverse Mortgages?

Before we dig too deeply into the topic, let’s figure out what reverse mortgages really are! The basic premise says that the bank will provide you cash in monthly installments, which slowly takes away the equity in your home. If you have a home that’s fully paid for, but are strapped for cash each month, this is a solution for you to remain in your home and increase your cash flow.

Are Reverse Mortgages Beneficial?

If you are currently living in a fully paid-for house, are too stubborn to move out, and absolutely need cash to survive, then I suppose this avenue might be beneficial, but I know I would never sign up for one!  Here’s why:

Negatives of a Reverse Mortgage

reverse mortgages1) Steep Fees Up Front – Just like when you buy a house, there are fees in order to get this process under way. Instead of “closing costs”, they are referred to as origination fees.

2) High Interest Rates – Do you know how you paid an interest rate when you were buying your house? Well now you’ll be paying more interest in order to get the equity out. I don’t even dare perform the calculation of what you spent on your house if you paid 5% for 30 years and then another 5% for the next 30 years. It could easily be four times the actual value of your house!

3) Must Repay the Loan When You Move Out – The amount that is being paid to you each month isn’t actually being taken away from the equity in your home; it is simply a loan that is backed by the equity in your home. So, as the bank continues to make those monthly payments to you, the amount you owe on your loan get bigger and bigger. If you pass away, then the loan will be paid by selling the house.

That doesn’t sound like a big deal, but what if you don’t pass away while living in your house? What if you are one of the 25% that need to live in a long term care facility? Once you vacate your house for a full year, your loan is officially due. Now you have to pay for your long term care and your loan. This is definitely not a great long term solution to your cash flow deficiencies.

4) Your Heirs May Not Inherit the House – I alluded to this in the paragraph above. Once you pass away, there is a loan that needs to be paid back. So, your family has a decision to make. Either they sell the house and pay off your debt, or they use their own money to cover the debt in order to keep the house. Chances are, your kids won’t have that kind of money and it will make it impossible for them to inherit your home and keep it in the family.

Reverse mortgages are a bad deal and I wouldn’t ever sign up for one. What about you?

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AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

2 Comments

  1. I would have to be down to my last dollar before taking out a reverse mortgage. There are endless stories of people losing their house for exactly the reason you pointed out. They move somewhere else and the lender then tells them to pay up. You are also correct that the interest payments are a killer. Many people who take out a reverse mortgage overlook the additional loan interest they have to pay.

    • Yeah, it really is sad how so many people are negatively affected because of their dire situation. People that promote this idea are entirely brainwashed. It’s a bad idea 99.99% of the time.


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