Tuesday, March 26, 2013

My Take On...Reverse Mortgages

Some of the toughest personal financial decisions that we make can stem from the harshest of circumstances.  Whether it’s debating whether to pay a collector for a bill owed, deciding whether to keep our children in private school, or trying to figure out how to pay for college, more often than not we or someone we love and care about has faced these tough crossroads. Generally I like to give straight talk and cut straight to the chase. For each of the aforementioned situations, without even blinking, I would advise: work out a deal with the collector –get it in writing- and keep your 4 walls up, take the kids out of private school until you’re on stronger financial ground, and tell the kids to work their way through community college and plan to transfer and do the same at an in state public college.

Each of the scenarios I just mentioned involve individuals that, even if at or a little beyond middle age, have the ability to leave the cave, kill something and drag it home. A 50 year old can work for a few more decades and a teenager can definitely work through several decades. But what about our seniors? What about those that are up in age (I’ll let you draw your own lines on what age that is), at the end of their ropes financially, and don’t have the physical ability to go out and be gazelle intense?

And those questions are what lead me to analyze the reverse mortgage today. First and foremost though if you or someone you know are in this situation, I want you to know that I am keeping you in my daily prayers and that I firmly believe that there is still light and hope at the end of tunnel. But let’s understand what a reverse mortgage is before I scornfully shred it to pieces.

Investopedia defines and explains a reverse mortgage as follows:
“a reverse mortgage is a type of mortgage in which a homeowner can borrow money against the value of their home. No repayment is required until the borrow dies or the home is sold…The advantage is that the borrower’s credit is not relevant because the home serves as collateral, it must be sold in order to repay the mortgage when the borrower dies.”

Essentially reverse mortgages are targeted at seniors that have equity in their homes and are struggling to meet living expenses. The first thing that jumps out at me when weeding through the details of this product is the plethora of fees. These range from: origination fees, closing costs, mortgage insurance premiums (in case the home does not sell for enough to pay back the loan) and fees for mandatory credit counseling.
But the clincher for me on why this is a bad product, is the fact that at the end of the day the reverse mortgage does not solve the borrower’s need for lifetime income. Equity in one’s home is finite and if the borrower has the need for hospice care or lives for even a year or two longer than anticipated, that equity can flow in and out of your fingers in a heartbeat.

To me the reverse mortgage is throwing one’s hands in the air and saying “I surrender.” The borrower cannot cover their living expenses with personal savings and/or social security, so they take out a reverse mortgage and the end result when either that equity is fully tapped or the borrower dies is to sell the home.
In my humble opinion, it’s better to be proactive in a situation like this. If you are in a scenario where you are considering a reverse mortgage, then take a pre-emptive strike. Instead of tapping into the equity, sell your existing home outright, and with cash in hand either move into a smaller cost-effective residence (studio, condo, modular home, etc.) or weigh your options and move in with family and/or friends that would be willing to take you in.

I absolutely agree that the statement I just made could in itself generate a month long blog series, but I firmly believe that it’s the best way to keep your head above water in this type of situation. With a reverse mortgage you lose your options and once the money runs out and/or you die, you will lose your home. In my alternate scenario you keep your options open and avoid burdening your beneficiaries with settling the balance due with your reverse mortgage provider.

It’s certainly not an easy situation to think about, let alone face. But if it were my grandparents at the end of their working careers and they did not have savings sufficient to carry them through retirement, I would NEVER ask you to carry that burden through your taxes and an inefficient government program. I’m their family and it’s my responsibility to help ensure they live out their retirement years with dignity. Whether that would mean helping them sell their $200,000 home and move them into our spare room, or helping them purchase a $30,000 modular home and help them plan the remaining cash for living expenses, I believe that if you are willing to make sacrifices and consider 3rd alternatives, there’s always a choice that exists that doesn’t include debt or limiting your choices, even in the most dire of circumstances. 

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