Reverse Mortgages

by Stacy Francis, CFP®, CDFA

I had lunch with a friend today, who works with mortgages. She said that while for obvious reasons, not that many people are signing up for conventional house loans at this time, many are inquiring about so-called reverse mortgages. For those of you not familiar with these, I thought I should share.

If you are a senior who own your home and need more income, some people will suggest that you take out a reverse mortgage. A prerequisite is that you have paid off a good portion – if not all – of your home. You can then get a deal where the bank “pays” you a certain sum of money each month, and your mortgage grows accordingly. In a way, these “payments” are the opposites of amortizations, where you own more of your house each month, and the bank owns less.

After you pass on, the bank owns whatever portion of your house that you have mortgaged. For obvious reasons, the bank will not let you lend more than your house is worth. They use complex calculations to make sure that the monthly sum they “pay” you is small enough that your total mortgage will not go beyond the value of the house during your life expectancy.

While reverse mortgages can be the only way out of a desperate situation sometimes, be very wary of fees if you are getting one for yourself (or someone in your family). Many times the fees are so huge compared to the amount of money you can take out; you are better off seeking an alternative money source.

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