Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

11/02/2009
What are the risks involved with reverse mortgages?
We've seen a large number of people beginning to go for reverse mortgages at younger ages. Could you discuss--given the greater longevity of women--some of the risks associated with this. I noticed just recently that Office of the Comptroller of the Currency has issued a new advisory and caution about reverse mortgages.
Kris Freeberg:
expert info »
I've heard arguments both for and against reverse mortgages, but I don't know anyone who feels GOOD about them. They are a retreat strategy, hardly ideal.

The way to avoid them is to get serious about earning a robust sustainable income and about keeping expenses under firm control - or in two words, industry and thrift. Without those two vital elements over the long haul, compromises like reverse mortgages are inevitable.
Gail V. Marquet:
expert info »
Reverse mortgages are a very bad idea. A paid-for home is a great investment and can provide greatly if your health fails later in life. If you do a reverse mortgage, you have the money during your retirement, but without other investments, you have nothing left when you might have to enter a nursing home. If you don't have a lot for retirement, the home can be sold and those monies used to pay for long-term care.

It's always best to pay off your home before retirement and not carry a mortgage. Your income will be greatly reduced in retirement, so any tax offsets with mortgage interest is negligible.
Bettye J. Banks:
expert info »
(1) If you have heirs who expect to inherit the property (and whom you wish to inherit it), just be aware that the debt on the house must be paid before they take possession of it. They might have to refinance the loan in their own names to pay off the HECM loan. Will your heirs have the willingness or the where-with-all to repay the debt? The mortgage company gets it if no one can repay the loan.

Remember that a Reverse Equity Mortgage is just that--a mortgage LOAN. The lending institution has a hook, too. [When the homeowner vacates the home] they get to take possession of the property and sell it for the current market value (hopefully for them at a significant profit.)

(2) If your general health is good, great! But if you need to leave the property long-term due to illness, you may have a problem. Remember, the house must be your principal residence, or the mortgage can call the loan due and payable.

I strongly suggest that you contact a HUD-approved housing counseling agency and sit through a counseling session with a certified HECM counselor. State your questions, and take heed of their advice. You can get the name of an approved agency through the HUD website online at HUD.gov or by contacting the National Foundation for Credit Counseling at NFCC.org. You call also call NFCC toll free at 800-388-2227 for the office closest to you.
Rosemary Ervin, CPA:
expert info »
A reverse mortgage is a complex loan secured by your home. It is usually only available to homeowners who are at least 62. They were designed to allow seniors to remain in their lifelong residences in their later years. Typically, [when the senior applies for the reverse mortgage] the home is mortgage-free, and the reverse mortgage works to give the senior access to their equity [in the home]. The reverse mortgage is very personal--for whatever reasons, the owner cannot afford to remain there without assistance. The loan balance continues to grow, just as a mortgage diminishes over time. The senior returns the loan when he/she vacates the residence. [Even without the loan] can the homeowner continue to pay utilities, taxes and insurance? Or would the homeowner benefit from
downsizing? The caution is to have a plan: how much do you need to borrow at one time or do you continue to keep borrowing over the years?
Pablo M. Bianchi, CFP:
expert info »
I believe that every situation would have a different answer. It is impossible to provide a blanket statement that would apply to multiple people without a comprehensive understanding of the individual financial situation. First, a cash flow analysis should be completed to determine the inflows as well as outflows of cash. Without [having done] a budget, you should not make any long-term decision.