While Americans may one day find themselves in need of reverse mortgages, they are still an often misused financial tool, write financial planners Nathan Bachrach and Ed Finke in a Cincinnati.com column this week.
They are useful in specific, rare instances, they say, but require research among potential borrowers who are considering proceeding.
“One of the newest tools in the financial industry is the reverse mortgage. Given their rapid rise and relative novelty, we want to ensure you can make an informed decision (or are able to help your parents make an informed decision) before proceeding,” they state in the article.
The authors advise caution through four general principles: weighing additional options; understanding risks, costs and fees; researching the full impact; and being way of any salesperson who cites a reverse mortgage as part of an investment strategy.
“A key feature of these mortgages is re-payment,” the authors write. “Unlike other home loans, homeowners make no interest or principal payments during the life of the loan. Interest is added to the principal and the loan does not become due until the homeowner dies, sells the home, or otherwise leaves the home for more than 12 months.”
But there are some additional notes that miss some of the key qualities of reverse mortgages, including a discussion of the loan’s non-resourse feature.
“If it’s discovered down the road that a generation of retirees don’t have the assets to pay for retirement, reverse mortgages may become a valuable instrument for keeping them in their home and with money to pay the bills,” the article concludes. “But right now, too much of the time, reverse mortgages are one of the most misused and overused tools in the workshop.”
Written by Elizabeth Ecker