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Dear Dr. Don,
What do you think of reverse mortgages? We are in our 70s and live on a small income.
-- Joyce Juncture
Dear Joyce,
Reverse mortgages are becoming popular as retirees with inadequate retirement income choose to tap the equity in their homes without the strain of adding loan payments to the monthly nut.
They're not for everyone. The closing
costs on these loans are coming down, but they
are still very expensive. Because you're not making
loan payments, the loan balance grows over time
as the interest expense is added to the outstanding
balance.
The requirement that at least one of the borrowers occupy the home as a primary residence can be problematic. For example, if health care or other requirements require both borrowers to live away from the home, it will trigger the loan to be called.
People with reverse mortgages also cannot tap the equity in their home for needed home repairs or other expenses.
It's a hard enough decision to commit to a reverse mortgage, let alone decide what to do with the loan proceeds. There's been a fair amount of press about how reverse mortgage borrowers have been pressured into buying annuity contracts that weren't appropriate for their financial needs. These borrowers often face high surrender charges if they decide to cash out.
The Bankrate feature, "Pros
and cons of reverse mortgages," provides a
nice overview of the issues, including the possible
impact of a reverse mortgage on Medicaid benefits.
You should also read the materials on the AARP
Web
site and the Department of Housing and Urban
Development Web
site.
I think more and more seniors will look to reverse mortgages to fund their needs for retirement income. The expanding market for these loans will bring down closing and other costs.
Of the different loan programs currently available, HUD's home equity conversion mortgage is the only reverse mortgage program that is insured by the federal government, and it should be the benchmark in comparing other loan programs.
The current outlook for real estate in many markets makes it a difficult time to enter into a reverse mortgage. Deflated property values mean lower loan amounts available to borrowers.
On the investment side, the payment options are often flexible enough that the borrower doesn't need to consider purchasing annuity contracts with the proceeds.
Explore the line of credit option because you're only borrowing what you need, when you need it. Unborrowed funds don't rack up interest expense and don't add to the loan balance.
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