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Are Reverse Mortgages Good for Your Finances?

Mar 7, 2008
A basic staple of the financial world is you, I and everyone should buy a home. Why? Well, it is well established that a home is good investment over time, one you can use to fund your retirement years.

The traditional mortgage can be described simply. The lender issues you a bulk sum of money to buy a property. In exchange, you agree to pay back the sum plus interest over a lengthy period of 15 or 30 years.

Most people view reverse mortgages as new financial tools. In truth, they have been around for over 50 years. As more people try to figure out how to access the equity in their home, the reverse mortgage is seeing a renaissance.

The reverse mortgage is one of the rare financial tools that allows for age bias. In fact, there is a mandatory age limit and it is legal. Simply put, you must be 62 year of age or older to apply for a mortgage.

In a reverse mortgage, you have equity in your home and a lender is willing to trade you cash now for a chunk of that equity. Yes, you are essentially selling the property to the lender, which is making payments on it over time.

Show me the money. That was the refrain of a famous movie with Tom Cruise. With reverse mortgages, you can get it in one of two ways. The first is as a lump sum payment. The second is in the form of monthly payments.

The biggest selling point of the reverse mortgage is the lender payback. Simply put, you don't pay the lender back. They recover their money when you pass away or the home is sold. Not bad, eh?

Are their any downsides to the reverse mortgage? If you listing to the advertising, you would think not. Look past the marketing pieces and the reverse mortgage can quickly become a horror show.

If you have heirs you wish to take care of, the reverse mortgage can be a nightmare. Remember, you are selling your equity in the home. When you pass away, this often results in little being left for your heirs.

The second problem is the loan is expensive. You can spend tens of thousands of dollars getting into the loan. The interest rate on the amount you owe is also higher than forward mortgages, often two to three points higher.

Sooner or later, home owners are going to have access the equity in their homes. Despite the big marketing effort, these loans are not a great option for seniors. Better ones exist, so speak with your planner to learn more.
About the Author
Barry Waxler is a financial planner who writes about financial planning for UFCAmerica.com.
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