Should You Get A Reverse Mortgage?
Dated: February 26 2020
Before you or someone you know gets a reverse mortgage do your homework!
As more people choose to stay in their homes for longer periods of time. I have been working with more people who have taken reverse mortgage loans out on their homes. They have wanted to use the equity to offset cost of living expenses as well as to supplement their retirement income. Most of the clients I have helped who have these types of loans did not fully understand the downsides to a reverse mortgage when they signed up for the program. Tapping into your equity in the form of a reverse mortgage can seem like a smart idea. But is it the best idea for you?
I recently helped a client sell his home of 35 years when he could no longer manage to live alone. He had taken out a reverse mortgage after his wife passed to make up for the loss of her Social Security benefits. At the time he thought it was a great opportunity and it allowed him to pay the bills for a few extra years without struggling. However, when he signed the loan no one explained to him that when he moved out of his home, he would have to pay the balance of the loan or give the house to the bank. Upon changing his address, he received a letter from the bank asking when he would be writing a check for the balance of the loan! He had three options, write a check for more money than he had ever had in his life, let the bank take his home and take a hit to his credit, or sell the home. He chose to sell and thought he would walk away with a bit of cash after the sale. This is when he got surprise number two, the bank had loaned him 80% of the value of his home but had been charging him almost 7% interest each year. The balance of his loan was now about 95% of the value of his home! When we did find a buyer and went to settlement, he had to come to closing with a check to pay for the difference in the sales price and his loan.
This homeowner is not alone, I just started working with a couple who was interested in selling their home because they could not keep up with the maintenance and repairs in their household. They had a roof leak and had to have the roof replaced, and have the ceilings and floors repaired. Their furnace was also damaged by the leak and would need to be replaced. They had taken a reverse mortgage years ago and took a lump sum payment. They were under the impression that when they sold, they would have to pay this amount back but did not understand that every year the interest on their loan would increase the amount they owed. When they contacted me the balance of their loan was 110% of the value of their home! Their options were limited and they did not have the funds to repair their home and had to take out other loans to pay for the repairs to keep their home livable. Now they are not able to do a traditional sale and may have to try to do a short sale if the bank would approve. Most likely though they have become trapped in their home unable to afford to move.
No loan option is completely without its disadvantages, however, and there may be downsides to a reverse mortgage you may have not considered. Before you or someone you know decides to open a reverse mortgage you should discuss this option with a financial planner or a mortgage lender you can trust to give you the complete and honest picture of the program you are considering. I am here to help if you would like to ask some general questions. If there is anything I can not answer I know several honest and trustworthy mortgage advisors who will give you the right advice.
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