Reverse mortgages can be used for a variety of functions, from purchasing a home to supporting a cash-strapped retirement. Borrowers, however, must not forget that these loans do become due and payable eventually.
In a recent column on The Dallas Morning News, nationally syndicated columnist and a principal of the Plano-based investment firm AssetBuilder Inc., Scott Burns, answers two questions from readers that get to the core of what reverse mortgages actually are and what they are absolutely not.
The first reader asks for advice on purchasing a new home using a “purchase-money reverse mortgage,” also known as a HECM for Purchase. Burns points out that although the reader currently lives in a home that’s worth $100,000 and has a large down payment to put towards another home, he or she seems to not realize the costs of actually maintaining a home worth seven times that of his or her current home.
Burns suggests that the reader examines the ramifications and consider his or her other income sources.
“Today you’re living in a house that probably has out-of-pocket annual costs of about $5,000, even though it has no mortgage,” Burns writes. “When you move into a $700,000 house, the annual operating costs will be significantly higher, perhaps $28,000.”
All in all, Burns emphasizes that even with a reverse mortgage, the reader still may have trouble maintaining a home that is much higher in value than his or her previous home.
The second question was from a reader asking for advice about a friend who had taken out a reverse mortgage in her 70’s who has no family or children and limited funds. The woman is now in her 90’s, according to the column, and can’t physically take care of herself anymore.
Her interest charges for her reverse mortgage are so much that she is upside-down on her home and has no assets to sell to help put herself in a nursing home. Burns’s response is blunt, but truthful.
“One solution would have been for her to die much younger,” Burns writes. “Another would be to go to a nursing home much earlier. Instead, she lived many years, independently, in a home she wanted to stay in.”
He explained that the issue in the woman’s case isn’t the tool, it’s the fact that she simply lived longer than her home equity could support, which can happen with or without a reverse mortgage.
The point Burns is trying to get across in both of his responses is that even with a reverse mortgage, unfortunately things can go south, much like with any other financial tool.
“Reverse mortgages are a financial tool,” he writes. “They are not a free lunch.”
Read The Dallas Morning News column.
Written by Alana Stramowski