Traditionally, there were two lines of thinking regarding reverse mortgages. The first held that reverse mortgages should only be used by those in desperate financial circumstances, after most other options have been exhausted. The other camp insisted that reverse mortgages are perfectly appropriate for all borrowers, as long as they are of retirement age and have selected a reputable lender.

Now a school of thought has emerged that suggests reverse mortgages are rarely, if ever, appropriate for the majority of potential borrowers. Goes the argument- borrowers who feel compelled to turn to reverse mortgages for cash are necessarily house poor. That is, a disproportionate share of their spending goes towards their respective homes. This condition is actually exacerbated – rather than alleviated – by taking out a reverse mortgage, which gradually erodes the equity in one’s home, based on inherently unattractive terms.

Granted, this characterization is overly simplistic. The idea behind it, however is meaningful and straightforward. Reverse mortgages are structured to the benefit of the lender. They are marketed aggressively towards borrowers under the premise that the cash can be used for fun-filled spending sprees, rather than for emergency needs. The implicit assumption behind reverse mortgages is that it is necessary for you to stay in your home.

While borrowers can be excused for the sentimental desire to want to remain in their homes at all costs, for the vast majority, it’s neither practical nor economical. Borrowers that obtain reverse mortgages often fail to scrutinize the terms of the mortgages because the flow of cash is moving towards them. Whether or not they are receiving reasonable compensation for the equity in their homes is beside the point. Most people are just grateful to have the cash.

Instead, why not consider moving into a smaller house or into a retirement community. While even contemplating such a ghastly decision might be anathema to many borrowers, it is eminently reasonable. In this way, all of the accrued interest that otherwise would have otherwise inured to the lender (in the form of equity) can instead be used by you, at your discretion. In addition, if you still decide that you want/need a reverse mortgage, you can always obtain one on the new property. For those that advise against this on the grounds that you are selling into a weak market, consider how illogical this is, since you are simultaneously buying into a weak market. Sell for less, buy for less; it should work out to be a wash, regardless of home price levels.

In the end, the best advice I can offer is not a definitive ‘yay’ or ‘nay’ regarding reverse mortgages. The decision is ultimately yours, and yours alone. Just remember that alternatives exist, and that there is no such thing as a free lunch.

One Response to “Reverse Mortgages are for the “House-Poor””

  1. Hattie Says:

    Sell for what price and buy for what price? I work with elderly in big cities. They live in neighborhoods where the nice houses and nice neighborhoods are 6 blocks away from the “bad” neighborhoods with lots of foreclosures. Their value is then limited. Where will they go to live on the proceeds of an undervalued sale? Don’t forget, these are rows of well kept houses with green lawns. They cannot replicate their community affordably. And who will give them a forward mortgage today? Many are not ready to live in a 3 room box.

    As you say, there are pros and cons, but a realistic evaluation is key.

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