Are reverse mortgages dangerous?
There are lots of things in life we need to be wary of - shady contractors, urgent donation requests from exiled princes from Nairobi, and bad fish at a cheap sushi joint. These kinds of things have the potential to hurt our pocketbook and even give us dysentery. We would do well to stay away from such dangers!
But should reverse mortgages be put in the "dangerous things" category? Will they wreck us financially and leave us feeling sick to our stomachs? This is what we want to briefly explore.
Simply put, a reverse mortgage or home equity conversion mortgage (HECM) allows seniors to use the equity they have earned to stop making their normal mortgage payments. So instead of the principal loan balance slowly going down over time, it slowly goes up over time. A traditional 30-year fixed mortgage is a "forward" mortgage because the principal balance is dropping and a "reverse" mortgage is the opposite.
This simple definition may be enough to make people concerned. But consider this - is it better for a senior to be able to use the equity they have worked so hard for in order to enhance their quality of life? Or is it better for them to live in a quasi-impoverished and stressful state and die with a home that is paid off or has a low loan balance?
By way of disclaimer, let me be the first to say that a reverse mortgage is not the right strategy for every senior who is 62 or older. For seniors who are fortunate enough to have well-funded retirements, a reverse mortgage may not be necessary or beneficial. This is not a one-size fits all kind of situation.
But for seniors who may be struggling to retire or in retirement, a reverse mortgage could be a literal God-send. With the right combination of factors - including age, equity in the home, and income, a reverse mortgage can convert captive equity so that the client can eliminate their mortgage payment and even get cash-out.
So what is so scary about reverse mortgages? Let's dispel a few misconceptions:
MISCONCEPTION #1 - IT IS A SCHEME FOR BANKS TO TAKE OVER YOUR HOME: This is probably the most misunderstood feature of reverse mortgages. It is important to understand that reverse mortgages are a government backed by FHA/HUD to help seniors "age in place." They are a social safety net program designed to help seniors make their equity work for them so they do not have to worry about housing in their twilight years. Also, the program is designed to try and avoid exhausting the home's equity. Even if the equity is exhausted, the homeowner can remain in the home until they leave them home or die.
MISCONCEPTION #2 - YOU WILL LOSE OWNERSHIP OF YOUR HOME: False. The homeowner(s) remain on title and can sell the home at any time. Any equity that is left is the homeowner's equity. If the homeowner happens to have exhausted their equity, the government eats the difference!
MISCONCEPTION #3 - THE ESTATE IS LEFT WITH NOTHING AFTER DEATH: It depends! If the home has equity left, the home can be sold as normal and any equity passes to the estate / family - however the mechanics work for each individual case. If the home does not have equity or has negative equity (the loan exceeds the value of the home), the estate / family is NOT liable for the difference!
There is much more ground to cover, but I hope this starts to clear things up a bit. A reverse mortgage is NOT like a bad piece of halibut at the strip mall sushi bar. Quite the contrary - it is a financial product designed to help seniors age more comfortably in their home.
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