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Reverse Mortgages

A new commercial featuring Tom Selleck discussing reverse mortgages prompted me to try to cut through the hype and talk about reverse mortgages.

Let me state up front that VibrantUSA does not offer reverse mortgages, nor do we make referrals to people who do. This profile is merely to provide a little background to our customers, many of whom might be candidates for such a product, and nearly all of whom are being told they should consider one.

I generally consider celebrity endorsements as a misleading tool used to convince the person watching that a wise and trustworthy person has already done their research for them. In most cases, the celebrity knows little or nothing about the product they are talking about, but are absolutely aware of how much they are getting paid to do so. I would never be convinced to do something just because a celebrity said I should.

That being said, the script that Tom Selleck follows in the commercial is actually quite reasonable in talking about a few facts regarding reverse mortgages. They can, in fact, be a great way for retirees to convert their home into something that can either increase their monthly income or provide funds to defray certain debts or expenses.

In simple terms, a reverse mortgage is really nothing more than a loan on the equity of your home, paid out to you in either a lump sum or in the form of a monthly payment. What makes it different from a traditional mortgage, is that you do not need to repay the loan during your lifetime. Instead, in most cases, the balance of the loan (including accrued interest) will be paid out of the net proceeds of your estate.

There are events that can trigger a required repayment prior to your death:

  • If you have a spouse or partner who is living with you but you are the sole borrower, that person may have to sell the home or move upon your death. You can avoid this by making sure that both of you are “co-borrowers”.
  • If you live somewhere other than your home (such as a nursing home) for longer than one year.
  • If you fail to pay your property taxes, insure the property, or let the property fall into disrepair.

My general advice to someone who has significant funds committed to a personal residence they can no longer afford, is to sell the home and move into something more practical. This too would free up your equity, (net of selling and moving expenses) but would leave you with a living arrangement less expensive and more practical for you. Clearly, not everyone wants to do this. Many wish to stay in their family home as long as possible. A reverse mortgage can be a way to allow that.

Putting the equity of your home to work for you seems like a “no-brainer”. I have three concerns for anyone who is thinking about a reverse mortgage:

  1. There is no free lunch. There are expenses associated with entering into a reverse mortgage and interest will be charged against the amount you borrow.  While both of these can be postponed until your death, eventually someone (whoever inherits your estate) will need to pay them.
  2. By taking a loan against your equity, you are reducing the amount of money left to your heirs. For many, that is fine.  My personal opinion is that the money is yours, and you have no obligation to leave it to anybody, but it is important to understand what is happening here.
  3. People who acquire a large amount of cash tend to be foolish with that money, spending it on things that they don’t need, and might eventually cost them even more to maintain. This is especially true in the senior market, where there are plenty of “advisors” offering plenty of things they would like to see you spend your money on.

A reverse mortgage may be an answer to your prayers, but remember that it is always a good idea to think twice and act once. If you have any doubts, make sure you speak with someone you trust who has your best interests at heart.

For more information, check out the Consumer Financial Protection Bureau at the link below:

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