Consumer Affairs: Reverse Mortgages May Not Be Right for Everyone

Reverse mortgages may be making a strong appearance in mainstream media and among financial planning conversations, but despite the recent reputation revival, a reverse mortgage is still not right for every older homeowner, Consumer Affairs reports

For potential borrowers, knowing all the facts about what a reverse mortgage really is as well as in-depth personal financial details are both vital before making any decisions, according to Consumer Affairs. A reverse mortgage could be a good decision if a homeowner is equity rich and cash poor, Stephanie Yates, professor at the University of Alabama Birmingham, said in the article. 

“If you are equity rich and cash poor, and plan to live in your current house for a long time, a reverse mortgage is certainly something to consider,” Yates said. “It’s a way to turn the value of your home into an income stream without having to sell the property or repay a loan every month. In the right situation, it can increase a retiree’s financial profile and positively affect their quality of life.”

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On the flip side, borrowers need to know that they are committing to live in their home until they die or move somewhere else and when one of the two does happen, they will be required to repay the loan. This brings the potential issue of heirs not inheriting the home as they may have thought, the article points out. 

“That is the number one reason anyone considering a reverse mortgage should consult with their children or heirs as part of the decision-making process,” Yates said. “A lot of children might be banking on getting that house when their parents dies. If the parents make a decision to do a reverse mortgage, the children may get the house after they die; but there is little or no equity in it.”

Another thing older homeowners should consider before applying for a reverse mortgage is the higher costs associated with the loan, when compared to average closing costs of other types of loans. 

In the situation where a reverse mortgage may not be the best option for a homeowner, downsizing to a smaller home can help save seniors money in retirement, the article adds. 

Read the full article from Consumer Affairs.

Written by Alana Stramowski

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  • Yates just doesn’t get it. She claims: “‘ “It’s a way to turn the value of your home into an income stream without having to sell the property or repay a loan every month.'” But reverse mortgages are not income or even an income stream to the borrower. Reverse mortgages are all about liquidity in terms of cash. The funds are borrowed; they do not come from a source where earnings for the borrower are involved. Consumer advocates of all people should be the most insistent on using clear and unambiguous descriptions and factual language but she fails on both points.

    By hypothesizing about children wanting the home, the author is showing a general lack of understanding of the actual situations of children. My children do not want my house. My son’s job, his wife’s social life, and their children’s lives are all centered around where his employer’s corporate headquarters is. It has taken seven years for his family to become fully acclimated to their current home. They are near one coast while my wife and I live much closer to the other.

    What most children do not want to do is to contribute monthly to the care of the parents if there is another way to help them. A HECM can help with that need. My son certainly does not want to maintain two households to maintain as his children go to college and get married. He would some financial help with all of that.

    While it is good to consider the desires of the children, most will end up selling the parent’s home.

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