Reverse Mortgage Loan Blog

Q: I hope you enjoy a good discussion as much as I do, as I’m going to try to convince you that a reverse mortgage is more than a last resort. Let’s look at a 70-year-old who has been very comfortable in his retirement, collecting Social Security and withdrawing 4 percent from his $500,000 portfolio.

Unfortunately, his portfolio has lost 40 percent of its value, is now worth $300,000, and in order to maintain his income he now has to withdraw 7 percent. We both know that by withdrawing 7 percent that $300,000 will go fast.

Why not enter into a reverse mortgage, leave the portfolio alone so it can have a chance to recover, and use the equity in the home (tax-free dollars) to make up the income from the portfolio?

When the portfolio has recovered a bit, stop using the equity and return to the portfolio, keeping in mind the equity not used in the reverse mortgage is in a growing line of credit that is available at any time for any reason.

A: I always enjoy a good discussion – and even a good argument. After all, I am an attorney by profession. You raise a good point, but I still believe that a reverse mortgage should be considered only as a last resort. Perhaps, in your example, it is a last resort for that gentleman who lost a lot of his retirement income.

Quite recently, John Dugan, comptroller of the currency, warned that “the ability of consumers to access their home equity through immediate and large-sum payments can pose substantial risks.”

What are these risks? Misleading and deceptive marketing is one. Another is that some reverse mortgage borrowers have not kept current on their insurance and real estate taxes, thus leading to more foreclosures.

And, perhaps most significant, the up-front fees and charges are very high, and in your example, our gentleman would be losing a lot of his equity just on those costs alone.

And now a word of caution for anyone considering a reverse mortgage: Make sure you fully understand all of the terms and conditions, and don’t be persuaded to buy insurance or other annuities with the moneys you receive through this type of loan.

Found here.

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