I recently saw an article that said Detroit leads the nation in reverse mortgage foreclosures. Typically, a reverse mortgage foreclosure occurs when the homeowner fails to stay current on property taxes and/or insurance on their property. The result of a foreclosure on a senior’s home can be devastating in the fact that they could lose their home.
Reverse mortgages can be a great tool for seniors who need extra money for living expenses or home improvements; however, if a reverse mortgage is not used correctly, it can cause severe hardship to a senior. That is why if you are considering a reverse mortgage you should make sure you are not sold a bill of goods; rather, a reverse mortgage that will work in your situation.
Typically, the way a reverse mortgage works is that the mortgage company allows you to borrow against the equity in your home. What makes reverse mortgages attractive to seniors is that they do not have to make a mortgage payment on the loan, and they can stay in their home for as long as they choose. The loan is not due until either the homeowner passes away or when the home is sold. If the senior sells their home during their lifetime, then the loan is discharged from the proceeds of the sale. If the homeowners live in their home until death, there are a couple of different options. The beneficiaries of the senior can choose to pay off the mortgage either by refinancing or selling the home, or if the house is worth less than the outstanding mortgage balance, they can simply turn the home back over to the mortgage company without consequences. Therefore, if used correctly, reverse mortgages can allow a senior to stay in their home for the rest of their life, and free up resources to maintain their quality of life.
One of the mistakes many seniors make when they obtain a reverse mortgage is that they do not use the proceeds wisely. All too often, you see seniors using that money for frivolous purposes, to give or loan to family and friends, or even to invest the money. As far as I’m concerned, the aforementioned are not good uses for reverse mortgages. From my perspective, the best use of monies from a reverse mortgage is either to pay off high interest-rate debt, like charge card debt, or to use the proceeds to supplement your income. I’ve also recommended reverse mortgages to seniors in order to use the proceeds to pay off their first mortgage. The key, as far as I’m concerned, is that the money should only be used for the direct benefit of the senior.
Reverse mortgages can be great tools, however, they are not for everyone. That is why before a senior considers a reverse mortgage, they need to do the necessary homework to understand how reverse mortgages work, and to see how it fits into their individual situation. For example, if someone was telling me that they are going to move in the next year or two, I would tell them a reverse mortgage would not make sense. On the other hand, if someone told me they plan to be in their house for the rest of their life, a reverse mortgage would be something to consider.
When obtaining a traditional mortgage, it is important to shop around. The same applies to reverse mortgage companies. There are a variety of reverse mortgage companies, and you want to deal with one that you feel comfortable with, and not one that is trying to sell you. In addition, before you get a reverse mortgage, you need to decide exactly what you are going to use the money for. You cannot treat this money as a bonus, because it is not. The purpose of the reverse mortgage is to supplement your lifestyle, and that’s what you need to focus on.
As I mentioned earlier, I would not take out a reverse mortgage and use the proceeds to loan to family and friends. I recognize it is sometimes difficult to say no to relatives, particularly grandchildren; however, this is a time you have to think of yourself. After all, someone’s home typically is their cushion, and you do not want to lose that cushion. Therefore, for those of you who are considering a reverse mortgage, take your time, think it through, and before you sign for the mortgage, make sure that the reverse mortgage is needed to help improve your quality of life.
Good luck!
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.