Are reverse mortgages finally getting some respect?
Actors we haven’t seen for years (think Robert Wagner, Pat Boone, Alex Trebek, and Henry Winkler) are trying to raise their stars again by pitching reverse mortgages. By 2010, nearly 10 percent of all reverse mortgages were in default. Those two reasons and others contributed to a lack of respect for a financial tool aimed at those 62 years old and beyond. But, now some financial experts suggest that a government overhaul to the reverse mortgage program in 2013 and some new research on the use of reverse mortgages make it a viable tool for those looking to make long-term financial plans.
Anybody looking at reverse mortgages should carefully weigh the costs and benefits of a reverse mortgage before getting one.
High fees. There are a lot of fees associated with a reverse mortgage. A lender can charge 2 percent of the initial $200,000 of a home’s value and 1 percent of the remaining value, with a cap of $6,000. You may also owe a monthly service fee of up to $35, as well as traditional closing costs. Those fees mean that a reverse mortgage should not be a loan of first resort for people looking to ease their retirement finances. They also mean that if you aren’t looking to continue living in the home you are hoping to get a reverse mortgage on for at least the next seven to 10 years, getting a reverse mortgage may not be worth it. Those fees are aggravated by an interest rate that is often higher than the rate for a traditional home equity loan. The result is that a reverse mortgage may bring in a great deal less than you hoped. It’s a good deal for the banks but it may not be such a good deal for you.
Loss of inheritance. For most people, a home is generally our largest investment. That makes its value to our heirs without compare but a reverse mortgage is paid off when your home is sold. If you die, your heir’s will either have to sell the home or pay of the reverse mortgage.
You don’t have to die to put you on the hook for repaying the loan. A reverse mortgage is made on your primary residence. That means that you must consistently live in the home if you want to avoid paying back the loan. If you transfer to a nursing home or decide to move, you’ll need to repay the loan. You are also still on the hook for costs such as taxes, insurance and upkeep.
Enhance financial plans. John Salter, an assistant professor at Texas Tech University, and two colleagues, studied ways that a reverse mortgage could provide a way to enhance long-term financial plans responsibly. They suggest tapping a reverse mortgage in a falling market rather than the portfolio and then repaying the money when the market recovers.
Create monthly income. Gerald Wagner, CEO of Ibis Software, a company that does reverse mortgage analysis suggests that adding a reverse mortgage to the retirement mix can help retirees achieve a more sustainable withdrawal rate.
Before you make any decisions about getting a reverse mortgage, you should check to see how having a reverse mortgage in some states may impact your ability to qualify for government benefits such as Medicaid (see how Washington state handles reverse mortgages here). Those considering a reverse mortgage should consider all the risks and costs before making such a decision.
If you are considering a reverse mortgage, check with a financial planner to determine if there might be better options for either using your reverse mortgage.
What happens with your reverse mortgage after you die
or check out our white paper on Reverse Mortgages.