Investing: The Ins And Outs Of Reverse Mortgages
BY Jeffery Voudrie
Reverse mortgages have been around since 1989, but they are rapidly gaining in popularity. The complexity of reverse mortgages makes it difficult for the average senior to separate myth from reality. Let me help you decide if one is right for you.
I believe that the reverse mortgage can work effectively for seniors in the right situation. I'm also concerned that they are being heavily promoted to seniors who shouldn't be using them. Last week, I explained the ins and outs of interest-only mortgages and how they can be a valuable tool for some seniors. I also warned readers against the option-ARM mortgage. Those articles can be found at www.guardingyourwealth.com.
The number of reverse mortgage originations doubled between 2003 and 2004. These numbers may continue to double each year. The media is filled with sales pitches for these mortgages, promising easy money and painless solutions to senior's financial problems.
You must be at least 62-years old to get a reverse mortgage. They are designed to help financially strapped seniors meet their living expenses and to stay in their home. A reverse mortgage allows the homeowner to tap into their home equity without having to make monthly payments. So it can increase the money available for expenses without adding to those expenses.
Reverse mortgages allow you to receive money in several ways. The most popular is the equity line of credit. This way you only borrow money as you need it. You can also receive a lump sum or fixed monthly checks for the rest of your life, much like an annuity or pension. You can even receive a combination of these options. The amount you receive depends on your age, the value of your home and even the area in which you live.
A reverse mortgage is still a loan, but it's not paid back until the last mortgage holder dies, your home is sold or it's left unoccupied for 1 year. If you and your spouse go into a nursing home and don't occupy the home for 1 year, then the loan becomes due and your house must be sold. You (or your heirs) would receive any money left over after the reverse mortgage is paid. If the house sold for less than the loan amount, the lender would have to eat the loss.
Lenders won't allow you to borrow the full value of your home. Depending on the program and other variables, you may only be able to access 60%25 of your home equity. It can be far less than that. Fees can be very high and options can vary widely from one provider to the next, so making accurate comparisons between providers can be very difficult.
I believe that a reverse mortgage can work well for seniors who have a limited income and wouldn't otherwise be able to make it without tapping into their home equity. A reverse mortgage can be a low-risk way for seniors to remain in their home for the rest of their lives. That's why HUD created reverse mortgages in the first place, to help cash-strapped seniors stay out of poverty without losing their homes.
A reverse mortgage shouldn't be used, though, until the money in Certificates of Deposit and other investments is already gone. A reverse mortgage should be the source of last resort.
That's certainly not the message you get from reverse mortgage providers. They show middle class seniors now free to travel or buy that nice new car. Too often, seniors are being enticed into these mortgages by the idea of it being 'free' money. It isn't. If you spend your home equity now on non-essential purchases, you won't have access to that money later should you really need it.
I think a reverse mortgage is wrong for those being tempted to live beyond their means. Even worse is when financial advisors encourage proceeds from a reverse mortgage be used for other investments, such as equity indexed annuities.
Be very hesitant if you are approached by a mortgage broker by phone, seminar or mail. Remember, using money from your home isn't 'free' money. Spending it is no different then spending money in a CD or taking your principle out of a mutual fund.
Have a financial question? Send me an email and I'll personally respond, free of charge. Go to www.guardingyourwealth.com and click on 'Ask Jeff'.
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In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.
ABOUTH THE AUTHORNationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He'll answer your financial question - FREE at www.guardingyourwealth.com. |
