Dear Ali: I’m retired and some of my stocks have suffered all this financial trouble we’ve been having, so my banker mentioned a reverse mortgage to me. What do you think, is that worth looking into, or is there a catch? I can’t tell if they’re scams or not.
A: They’re not scams, but the title “reverse mortgage” is a little confusing, I think. The product — FHA (which calls it a Home Equity Conversion Mortgage) and Financial Freedom are big providers — is really a loan from the bank available to people age 62 and older.
It’s a loan where the bank gives you the money in dribs and drabs, and the loan is repaid under a couple of different circumstances, usually when the house is sold because the borrower/homeowner moves or dies.
So essentially what you’re doing with this product is drawing down your own equity.
If you die, then you’re simply leaving that much less to your estate, which is why I think of “reverse mortgages” as “screw-your-kids mortgages.”
Now many of you will argue that your children are grown and have their own jobs, and don’t need any more of an inheritance.
But what if you move?
Then, with this product, you’ve basically drained away your own equity. Let’s take the scenario, for example, that you planned to finish out your golden years in your current home, but instead you break a hip and need assisted living. When you sell your place, you won’t get a big chunk of cash to help you make the move because of the reverse mortgage.
If you can live with that scenario, then a “reverse mortgage” might not be a bad thing. You can get money out as regular payments (like passing “Go” in Monopoly”), or as a line of credit (like you would with a conventional Home Equity Line of Credit) or some combination of the two.
Other important reverse mortgage facts:
- A reverse mortgage is not a free pass — to continue our Monopoly analogy, it’s not free parking. You still have to pay your heating bills and property taxes. Don’t keep up with the latter, and your loan comes due.
- You can’t outlive your loan. You borrow an amount based on your home’s equity and your life expectancy — but if you live longer than that and you’re still in the house, you keep getting payments from the bank. (So the product essentially becomes a screw-the-lender mortgage).
- Don’t reverse mortgage Tara. As you can see from the bullet point above, if your heirs sell the house when you die, they will have to pay back the value of your home, but not the value of the extra payments. However, if your heirs want to keep the beloved family homestead, then they must pay back the value of the home plus the extra payments.
- Just like other loans there are still closing costs involved, such as origination, document prep, flood certification. In “Out of Cash; Six Ways to Know if a Reverse Mortgage Will Help,” Moneywatch’s Kathy Kristof notes that as much of 2 percent of the loan value can go towards insurance fees — that’s a hefty $12,510 on a $625,500 loan. A long list of possible fees is here, courtesy of NRMLA, the National Reverse Mortgage Lenders’ Association, the industry’s trade association.
Finally, for those who live in the West, Northeast, or Florida, there’s a product that functions like a reverse mortgage but isn’t: Equity Key. With Equity Key, the company takes out a life insurance policy on you, and that’s their security instead of your house. They also get some rights to the equity in your home, but not all of it. To be eligible for this, you have to be between 65 and 85 — and, since the company is taking out insurance on you, in pretty good health as well.
