We’ve all seen the TV commercials: Fred Thompson, Robert Wagner, Henry Winkler and others urging us to sign up for a reverse mortgage.
As alluring as the ads are, financial commentator Greg Heberlein says anyone considering such a deal needs to give it some serious thought.
A reverse mortgage is what the name implies.
In a normal mortgage, the worth of your home grows through mortgage payments and rising property values. But under a reverse mortgage, the equity in your home, your stake, declines over time as a financial institution makes payments to you. You can qualify for a reverse mortgage beginning at age 62.
Sounds pretty sweet, right? Your retirement is paid for because you built up the value of your home. These arrangements are legal, and the majority of them are authorized by the government.
Then why worry?
Reverse mortgages are expensive.
A variety of fees—mortgage insurance, title search, loan-origination, closing costs—are deducted from the amount you get. These alone can subtract 10 percent from what you thought you might get.
In addition, such costs as mortgage premiums, interest and service fees reduce the payments you might get over time.
They're not a good deal if you want to leave something for your heirs.
If the amount paid to you eventually exceeds the value of your home, your heirs receive nothing.
If you fail to maintain your property, if you move out, if you die, the bank can foreclose on you.
And a quirk: if for some reason the spouse is not on the loan papers, that person can lose the house if the borrowing spouse dies.
People entering retirement today are facing greater financial burdens earlier.
This is due to a variety of reasons: declining numbers of employees covered by pensions, failure to save enough for retirement, the increasing age to qualify for Social Security.
The average age for those signing up for a reverse mortgage has declined from 77 to 73. But there’s a scarier statistic. The number of those enrolling between the ages of 62 and 64 has grown to one out of every five seeking such deals.
The cash can be distributed in a lump sum or regular payments over time.
Increasingly, participants, especially the younger ones, are taking the cash up front, using the deals as ATMs to finance current expenses. That means when a greater need arises at a later age—let’s say increased medical expenses or the cost of a retirement home—wherewithal to pay those costs has evaporated.
Why do the TV salesmen exist?
They have greater incentives to persuade you to collect more than the limits in a government program.
Government programs are limited, depending on your equity and age, in how much you can take. The limits vary, but $250,000 is a good round number. However, the private company is much less restrictive. Such plans can make $1 million or more available at much higher costs.
So what is the cash-strapped retiree to do?
If the need truly exists, consider selling your home and buying a cheaper home or renting.
Other options include home-equity loans or home-equity lines of credit. Chances are such moves will cost you much less with most of the same benefits.
The best option is a good savings plan.