VOL. 127 | NO. 126 | Thursday, June 28, 2012
Rays of Wisdom
Dana and Ray Brandon
Think Twice Before Getting Reverse Mortgage
By Ray and Dana Brandon
Ray’s Take Anytime you see celebrities promoting a financial product on television, it should give you pause. The past few years everyone from James Garner to the Fonz has hyped the advantages of a reverse mortgage, so take warning.
A reverse mortgage can be helpful to retired people with few resources, but should only be considered as a last resort; and it is definitely not a good option for younger retirees.
A reverse mortgage is a special type of home loan that lets qualifying individuals over age 62 turn home equity into cash received either as monthly payments, a line of credit, or a combination of the two. Unlike regular loans, there are no monthly payments toward principal or interest. However, both principal and interest do come due in full when you sell or no longer live in your home. That’s the catch.
The amount you owe on a reverse mortgage grows over time, with interest charged on the outstanding balance. Debt increases with every payment you receive. Plus, there can be substantial costs up front and sometimes monthly fees. It all adds up to more debt.
While most reverse mortgages are structured to prevent you from eventually owing more for your home than it is worth, a housing bust like the one we’ve recently experienced could change that. Then add to all this the fact that you still have to pay property tax, utilities, and home insurance, including hazard and flood.
These loans were designed for house-rich but cash-strapped older people who have no other options. However, 20 percent of these reverse mortgages are now being taken out by seniors aged 62 to 64; and nearly half of all the borrowers seriously thinking about a reverse mortgage are under 70.
Most of these loans require counseling before signing on. That’s a good thing, because with a reverse mortgage you could run out of money and be left with nothing.
Dana’s Take Reverse mortgages sound too good to be true. After all, how can something with the word “mortgage” in it be a good thing financially? Let’s hope Bernie Madoff and Stanford Financial have taught us caution.
Retirees have suffered a financial one-two punch in the last decade, with shrinking investment income and declining home values. Many members of “The Greatest Generation” enjoy the security of owning their homes outright. Giving a financial institution claim to that entire asset sounds risky.
Consult an independent financial adviser to make a balanced financial plan before signing away your largest asset. The guy on the commercial may not be around to pick up the pieces if things don’t turn out as advertised. Your brick and mortar today may be worth more than their promises for tomorrow.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at firstname.lastname@example.org.