Opinion: Reverse mortgages: should older people do it?


I see Tom Selleck and Henry Winkler on TV selling reverse mortgages all the time. I’m pretty sure Magnum PI and Fonzie, now 76 and 75 respectively, don’t personally need the product they sell, but what about you?

What is a reverse mortgage? It is a loan that the bank provides you with backed up equity in your home. Here’s an example. Let’s say your mortgage is paid and your home is valued at $ 285,000 (roughly the price of a typical home in May, according to Zillow). Generally speaking, if you are 62 or older and your home is your primary residence, you can borrow against that amount, which will give you extra money to live on during your golden years. If your home is worth $ 285,000 but you still owe, say, $ 100,000, you could potentially borrow against the difference.

Read: This New Type of Reverse Mortgage Could Help Seniors Increase Income

You can receive money in a variety of ways, including a lump sum, a set amount each month, or a line of credit. Also: A reverse mortgage usually does not require you to return the money to the bank.

Considering how heavily millions of older people depend on social security (the average monthly check this year is a modest $ 1,543), a reverse mortgage can make a big difference to many people.

Of course, that’s not all, and while a reverse mortgage may be a wise decision for some seniors, it may not work well for others. Here’s what ads don’t tell you:

  • The entire loan amount is payable if the borrower 1) dies, 2) moves, or 3) sells the house.

  • You are still responsible for basic expenses such as property taxes, maintenance, and insurance.

  • Taking a reverse mortgage means spending possibly a significant portion of your capital on loan fees and interest that can accumulate.

  • You may not be able to transfer your home to your heirs.

A reverse mortgage is an important financial step. As always, the best advice is to fully discuss this with a trusted advisor. And, of course, don’t be influenced by what some calm TV star says.

Some additional perspectives that can prove to be very useful, both for and against, can be found in the new report of the always illuminating Squared Away Blog,“Published by the Center for Retirement Research, Boston College.

Addressing both sides of the problem, it notes that “equity has great potential to alleviate the financial problems of retirees – after all, roughly $ 8 trillion in wealth locked in old people’s homes. ” This can actually reduce the financial stress that many retirees can experience as they continue to age.

Yet few older people choose this path. The blog added: “While raising capital could be a viable way to generate more income, few retirees are convinced they should. A total of about 42,000 federally insured home mortgages (HECMs) were sold in 2020. ” You may be surprised to learn that ten years earlier, twice as many seniors took the reverse mortgage path.

Why has a reverse mortgage not caught on? The paperwork and fees that are an inevitable part of any reverse mortgage are a waiver;the report also notes a lack of trust in relation to a reverse mortgage, “which is more complex than a standard mortgage.”

Meanwhile, another report, this time by the Consumer Financial Protection Bureau (CFPB), suggests a different reason, namely that seniors understand that reverse mortgages just not viable for any homeowner who plans to sell their home at some point.

There is also a social security corner here. The longer you wait to get Social Security, the greater the benefit. Why not take a reverse mortgage, say 62, and use that money while your Social Security benefits go up? It looks like a temporary loan. But CFPB calculators have calculated that this is generally not a good idea due to the aforementioned interest and fees. “Reverse mortgages are an expensive way to defer Social Security,” says the CFPB, adding that “the cost of a reverse mortgage is $ 2,300 higher than the additional cumulative lifetime amount that a typical borrower expects to receive from an increased Social Security benefit. ”

Tom Selleck and Henry Winkler are great actors and I’m sure they are good guys. But you won’t hear them pronounce these lines in their commercials.

As usual, consider that a reverse mortgage can be helpful. But that could also be harmful. Turn off the TV, do your homework, get reliable advice, and proceed with caution.

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