Reverse Mortgage Risks and Benefits in a Nutshell

Much continues to be written about the use of reverse mortgages as a source of retirement income. Also, reverse mortgage products are aggressively promoted by the companies that offer them. That by itself should raise a red flag for those considering them. With so much invested in marketing these products, you have to suspect that a reverse mortgage is a much better deal for the lender than for the homeowner-retiree. That means, of course, that they are a very expensive way to generate retirement income.

This morning, I came across an article that does a very good job of summarizing the  pros and cons associated with the use of a reverse mortgage in retirement. In fact, reading just this quote can give you a good feel for the reverse mortgage industry:

Reverse mortgages are full of pitfalls and they are very expensive — but they are very valuable to the people for whom they work. If you are sitting on a mortgage and you can afford to make payments on it, and have home equity and other assets, this is probably not a good idea. But if you are 85 years old and have $250 a month in income and a $500,000 house, it’s a great idea no matter how much it costs, because the lender will give you money you don’t otherwise have.

For those retirees who might fit into that last sentence, there is probably a better approach but it requires foresight and advance planning. That approach is to sell that $500,000 house before you become 85 and broke, move into something more affordable (or rent), and use the equity to generate income. Heck, at age 85 you don’t need to generate income. Just put the cash in some CDs and spend it as needed.

The article makes another important point. Many seniors are tempted by sales pitches that tell them to use a reverse mortgage as a source of cash to buy cars and take vacations. That is a bad idea, again because of the cost. Your $5,000 vacation could cost you $10,000 in lost equity and fees.

A final thought and warning, again from the article: A reverse mortgage becomes payable in full if the retiree fails to pay property taxes and homeowners insurance, or neglects needed repairs on the house. According to the National Consumer Law Center, those scenarios are becoming more common. This means it is extremely important that the retiree have income and cash reserves available to take care of all the other financial obligations of home ownership before considering a reverse mortgage.

Here is the link to the full article: Reverse Mortgages: Do the Benefits Outweigh the Risks?

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