Is a Reverse Mortgage right for you?

You have seen the ads on TV of a certain distinguished looking gentleman endorsing a product called a reverse mortgage. A reverse mortgage is a financial product which allows homeowners  over 55 access to equity in their homes in order for them to continue to live there. With a reverse mortgage you do not make monthly mortgage payments but rather the interest accumulates and must be repaid when you sell your home, die or no longer live in it. Because you are not making payments to lower the principal amount as would occur in a regular mortgage, you are in a sense paying interest on interest. After having spent a large portion of your working life paying off your mortgage, to get a reverse mortgage would put you in a position of doing what the mortgage is called- Going in reverse. This concept goes against all the financial lessons you have learned in life and all the advice you have given your kids growing up!

All throughout your years of making monthly payments you longed to see the end of the road and being able to burn your mortgage.

The fees to initially set up a reverse mortgage are similar to a traditional mortgage, appraisal fee, lawyers fees, administration fees, but in my research I have found the interest rate on a reverse mortgage to be 2-3% higher than a regular mortgage. In five or ten years that extra percentage can really add up!

Also, say you move to a rental apartment or a retirement village and decide to help your granddaughter or grandson by allowing her to live in your current home. Since you are no longer living in the house, the mortgage would become due and you would have to sell the house or repay the reverse mortgage another way.

Since no monthly payments are required and you, the borrower, can stay in the house indefinitely, it would seem the lenders could be at risk of losing money if the borrower continues in the house for another 25-30 years. Well not so. The lender calculates the amount they will lend you based on your age and gender (life expectancy). Plus any anticipated increase in value of the home would protect them as well. They are not going to make a bet they can’t win!  

This may be a good product for some people as a last resort and after all other avenues have been exhausted. Someone who has very little income and does not qualify for a regular mortgage/secured line of credit or someone who is very near the end and does not expect to many more years (Hey, this is reality here!). But for most people I would think a secured line of credit from a bank with only monthly interest payments is probably the best way to go.