An advertising agent emailed me the other day. They had a high-paying offer for me if I were to post their ad about reverse mortgages. I flat out refused. Reverse mortgages are fairly new and at first glance, they don’t seem like too bad of a deal. You have equity in your home that you would like to use while you are alive and the bank is willing to make monthly payments to you to do it. Sounds like a win-win! Well, most likely not. Most of the time, the bank is winning and you are most certainly losing. Let’s start by answering your question, “What is a reverse mortgage?”
What is a Reverse Mortgage?
Okay, so what specifically is a reverse mortgage? According to Investopedia.com, a reverse mortgage is:
“A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan.”
In other words, a reverse mortgage is used when a retiree does not have enough money to survive day to day, but has equity in their house. So, they take out a loan with the bank and promise to repay the loan when they die with the sale of their house (this is set up in their will of course…it’s kind of hard to do all of this from 6 feet underground). Plain and simple, homeowners sign up for reverse mortgages so they can get a monthly paycheck.
So What Are the Drawbacks?
Many of us seem to forget that a bank is a business. No matter what they say, they are not interested in your wants and needs, they are interested in making money, because that’s what needs to be done to survive as a business. So don’t think for a second that you are getting the upper hand when you borrow money from a banking institution.
So what are the drawbacks of reverse mortgages? After all, it sounds pretty cut and dry. You get a monthly check from the bank, and then you’ll owe that amount back once you die. Actually, that’s not quite right.
1) You have to start paying interest again
When you first bought your house, you realized that you would have to pay interest to the bank for the loan. In the end, you paid almost double the amount for your home than what it was worth. If you sign up for a reverse mortgage, you’ll be doing this all over again. The bank will pay you in monthly installments and because of the interest, those payments will only total about half the value of your home. You might not think this is such a big deal since you’ll be dead at the time of repayment, but this action will result in less money for you and for your children.
2) The fees are enormous
In order to get a reverse mortgage, you’ll certainly need to pay some fees… a LOT of fees. In my area, I would have to pay a “Loan origination fee” of $2,500 and “Miscellaneous fees” that total another $2,511. In total, the average amount of fees can easily rack up to more than $5,000. No matter what the bank calls these fees, they are basically made to cover their butt in case the housing market tanks again. Their risk is diverted to you, which means that you’re getting a raw deal.
If you move out of your home, you’ll need to pay all of those monthly checks back to the bank (and don’t forget about the interest!). This doesn’t sound like a big deal if you plan to live in your house until you die, but what if you’re forced into a long-term care facility? If you don’t step foot in your home for a year, then the bank considers you moved out (even if you still own it) and will require a payment from you.
Talk about added stress to an already bad situation! For many, the reason they take out this loan against their house is because they didn’t have any money in the first place, and now they’re expected to pay back the loan in full while they are still alive? This probably isn’t going to happen.
4) Your house will not be enjoyed by your heirs
If you sign up for a reverse mortgage, your home will likely not get passed down to your children. In fact, it will only create a larger hassle for them. Not only will they not be able to have the house (because of the big price tag owned back to the bank), but they will now have the hassle of quickly selling the house in order to give those greedy bankers their money before they sick their collectors on you.
Do Everything You Can to Avoid Reverse Mortgages
So what is a reverse mortgage? It’s a rip-off. Avoid them at all costs. If you simply can’t survive on your current income, but own your house outright, then you need to sell your house. It probably isn’t your most favorite option, but it is likely your only sane one. Sell the house, get your full value out of it, buy a much cheaper house (or rent for cheap), and put the remainder of the money in a high-yield savings account. Chances are that you can live off this money for much longer than you could from the bank’s reverse mortgage loan.
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.