Are you feeling lucky, older person with a house that is paid off or mostly paid off? Do you think a reverse mortgage will be the answer to stay there? I have long been a skeptic of this much shilled financial loan product as seen on TV. There are now some new protections and refinements to make it a safer choice, but I want to relate a cautionary tale.
What is a reverse mortgage? Here is the clearest explanation in my own words. You own a house that has value, you borrow against the value in your house to pay you a monthly amount or lump sum. You can use that money for home care other expenses but you have to keep up all taxes and repairs on the home or you default on the loan and lose the house.
Please read this callous defense of explanation of why a reverse mortgage turned out to be the worse choice for one home owner. I am copying this verbatim from a financial advice column as I did not believe what I read: Bold Italics are mine.
After reading your columns about reverse mortgages, I would like to offer a reason not to get one. An acquaintance took out a reverse mortgage when she was in her 70s. She has no family, no children and very limited funds. She thought she was doing the right thing to ensure she would have a place to live until she died. She is now in her 90s and is not able to take care of herself. The reverse mortgage company has charged so much interest that she is now upside-down on her home. She couldn’t pay back the mortgage company, so she has no asset to sell to put herself into a nursing home or hire caregivers. I think this is the kind of thing that should be pointed out when people are considering reverse mortgages. — S.H., Dallas
You’re entirely right about your acquaintance’s current dilemma. But think for a moment about the circumstances under which it could have worked out better. One solution would have been for her to die much younger. Another would be to go to a nursing home much earlier. In either event, the house could have been sold and the remaining equity — a lot if her departure happened soon enough — could have been used to cover nursing home expenses or been paid out to heirs.
Instead, she lived many years, independently, in a home she wanted to stay in. Having a reverse mortgage didn’t cause her to live too long. Having a reverse mortgage didn’t cause her to remain too healthy. But having a reverse mortgage did help her enjoy her independence for many years.
The issue here isn’t the tool; it’s that she has lived longer than her home equity could support. That can happen with, or without, a reverse mortgage. Reverse mortgages are a financial tool. They are not a free lunch.
Again there are newer protections with the federally back mortgages versus the proprietary (private ) ones. They are supposed to be structured so the above does not happen but based on whose lifespan? Proceed very carefully. Mirror mirror on the wall, who gets the best deal of all?