If you haven’t already, you’ll be seeing more and more ads on television and in
magazines touting reverse mortgages. Often the ads feature a once-popular celebrity
who couldn’t possibly lead anyone astray.
As our population ages, more and more seniors will be facing a crisis concerning how to
fund their retirement years. According to the U.S. 2004 Census, the median net worth of
American families was $93,100. When you consider that home equity is included in that
number, it indicates that few Americans are saving enough for retirement. For some of
these people, a reverse mortgage may be the only way they can survive in their later
years.
Regardless of the above facts, we believe that taking out a reverse mortgage to meet
your income needs should be a last resort option. Reverse mortgages are very costly to
acquire. You need to consider other options such as downsizing, which will free up
home equity and reduce property taxes, maintenance, utility costs and homeowner’s
insurance. Perhaps you can borrow against your home to meet your needs. If it’s likely
you’ll end up in an assisted living facility or nursing home, you’ll be better off financially if
you can wait to sell your home at the time you need care and avoid the high costs of a
reverse mortgage. If you take out a reverse mortgage and have to move to a nursing
home, you’ll be forced to sell your home, regardless, to pay off the high-cost reverse
mortgage balance.
You (and any other owners) must be at least 62 years old to acquire a reverse
mortgage. You must have either no current home mortgage or a very small mortgage
balance to qualify. A reverse mortgage is a loan against your home that doesn’t have
to be paid off until you permanently move out of your home, sell your home or die. At
that time, all of the money you’ve received plus interest must be repaid. You must live in
the home for the majority of the year. You are still responsible for property taxes,
insurance and maintenance. If you fail to pay for these items, your mortgage could
become due and payable in full.
How much you can obtain for a reverse mortgage depends on your age, value of your
home and the current interest rates. The older you are, the more valuable your home
and the lower interest rates are, the more you can obtain for a reverse mortgage. You
can receive the loan in a lump sum, in regular monthly payments, as a line of credit that
you can tap when you need it, or a combination of these three payment methods. The
money you receive is tax free. The loan balance grows as time goes on due to the
amount withdrawn and the interest that accrues. The amount owed can never exceed
the value of your home.
If you end up looking for a reverse mortgage (Remember, it should be your last resort
option!), loans that are federally insured generally will pay out a higher amount. The
fees fro such loans, of course, are higher to cover the cost of the insurance.
To obtain an estimate of what you might receive for a reverse mortgage you can go to
the National Reverse Mortgage Lenders’ Association web site at www.reversemortgage.
org. For example, a 62 year old in Michigan with a home valued at $ 250,000 could
borrow a maximum of $ 141,313 via a reverse mortgage with fees of $ 18,145, resulting
in available cash of $123,168. Fees include: (1) Lender loan fees of $ 4,522, (2)
Mortgage Insurance of $ 4,522, (3) Closing costs of $3,350 and a Service fee set-aside
of $5,751. (We told you these loans were expensive!)
Due to the high fees and commissions, salesmen will be trying very hard to sell these
products to everyone, whether they need it or not. We would expect some to try to
convince individuals who take out reverse mortgages to invest the proceeds in other
financial products in order to receive even more commissions. Before considering a
reverse mortgage, we suggest you visit the AARP web site and review their “5
Questions To Ask Before Considering a Reverse Mortgage” You can go to www.aarp.
org/money/revmort to view the questions.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, April, 2008,
A Reverse Mortgage Should Be Your Last Resort
By David and Erin Preston (formerly Patterson)