Wednesday, August 13, 2014

Reverse Mortgages, Santa Claus and the Tooth Fairy

I can remember that not so long ago TV was inundated with commercials touting the benefits of obtaining a reverse mortgage for the elderly. Maybe where you live this is till the case. The basic message was that you could enjoy the financial rewards of home ownership while still remaining in your home and without the need to obtain a 2nd mortgage. In other words you can get cash now and never need to repay it. Well, you and I both know there is no such thing as a “free ride” and a reverse mortgage is no different.

While it’s true that no payments are due from the homeowner while they remain in the home there are many stipulations to this type of loan that you should be aware of before considering this type of arrangement.

Someone has to pay the bill!
While it’s true that the homeowner need not worry about paying back the loan in their lifetime their heirs definitely do. In fact the entire debt must be paid before the heirs can take possession of the home and if it isn’t the lender has the right to foreclose the same as any other type of home loan. Do you have that kind of cash? If not, there goes your inheritance.

Everyone is affected
According to the rules of a reverse mortgage everyone living in the home with the homeowner(s) is considered to be a “tenant”. That means that if the homeowner needs to move into a facility or proper care facility at some point in the future that remaining family members can no longer stay there. In fact, they can legally be evicted. That’s something to think about if you have children or grandchildren that live with you.

Live Long and Prosper?
Due to advances in medical treatments today many of us can expect to live into our 90’s. With a reverse mortgage the amount that the homeowner can borrow is limited and it’s possible that the money will not last the rest of their lives. What then? Remember, the homeowner must stay in the home in order to keep possession or they will need to pay the balance of the loan. That means in the event of a catastrophic illness or injury that long term in home health care would be required and that is very expensive. When the money runs out what will then be the alternative? 24/7 health care could easily exhaust $200,000 or more in a 2 year period.

Even without payments default is still possible
Earlier I mentioned that there are many “stipulations” involved with a reverse mortgage. Well, being in default of your loan includes unpaid property taxes, a lapse in property insurance or even failure to properly maintain the home according to the lender’s rules. In the event that any of these situations occur the lender is able to foreclose. It’s not hard to imagine that an elderly person may not be able to maintain their property as well as when they were younger. It’s just as easy to understand that as we become older we tend to forget things, such as paying the property tax bill or making an insurance payment. But should we face foreclosure on our home due to a simple oversight that could otherwise be remedies quite easily?

I can’t say with certainty that a reverse mortgage is bad for everyone but in all cases the risk is quite high and at the very least leaving one’s home in their will as a final gesture of love and concern for loved ones would no longer be a possibility. The need to pay to claim your inheritance is not much of a “gift”.

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