You’ve seen the ads on TV. Seasoned actors like Henry Winkler talk about some great program that allows senior adults to borrow money from their home’s equity (value) so they can pay medical bills or take that dream vacation. They say things like, “You can have a better life!” Sounds like an amazing solution to your money woes.
But if Pinocchio were in that commercial, his nose would grow with every sentence he spoke! Those ads don’t tell you the truth: Reverse mortgages are a bad idea. A really bad idea.
Back in the Red
Here’s how the reverse mortgage works: You take out a line of credit against the worth of your home. You don’t have to pay back that money, but when you pass away, your home is sold to pay back that loan. Sounds simple, but it’s not.
With a reverse mortgage, you’re putting yourself back in debt. Deep debt. All those cozy commercials with The Fonz (Henry Winkler) make it sound like you’re getting money every month with no strings attached. That’s just not true. A reverse mortgage has more strings than our friend Pinocchio! Sure, you don’t have to pay a monthly mortgage, but that’s the least of your worries. Not only will you be charged interest every month on the money you receive, but you’ll also get fleeced with outrageous fees. Here’s a list of what you’ll be charged either upfront or monthly:
- Loan origination fees (paid once)
- Mortgage insurance premiums (MIP) (monthly)
- Closing costs (paid once—includes title insurance, home appraisal and home inspection)
- Servicing fees (monthly)
- Interest (monthly)
Let’s do some math. According to AARP, the average life expectancy of a 75-year-old woman is 87 years of age. If she took out a reverse mortgage of $67,500, here’s what she would expect to pay in costs (not in repaying the loan) over those 12 years, roughly speaking:
- Upfront costs: $12,000
- Monthly MIP (over 12 years): $8,000
- Monthly servicing fees (over 12 years): $5,000
- Monthly interest charges (over 12 years): $111,000
The total cost of the loan—not including the original loan amount—is a whopping $136,000! That’s not okay! Plus, you are still responsible for property taxes, utilities and other costs of maintaining your home. And if you ever leave your home for 12 months or more, you are in default of that loan! That means you have just six months to pay back the loan or you’ll lose the house—and you’ll never get back any of the money you’ve already paid, including those upfront fees.
Reverse mortgages are just a bad choice, no matter how you do the math. You have lots of other options if you need money.
Where to Go, What to Do
If you’re struggling financially, don’t get sucked into this trap. You’ll only make the problem worse. Talk with your financial coach and your family before you do anything. See if one of these options will help:
1. Check your lifestyle. Before you make any hasty decisions, look at your monthly budget. Small changes like cutting that huge satellite bill, buying generic medication, and using coupons can make a big difference. Talk with friends to see how they’ve cut costs. A little bit can add up quick!
2. Look into federal and state assistance. You can get help with medical bills, prescriptions, food, utilities and more. And it’s certainly better than having to sell your home. Some state and local groups even offer to do home maintenance for free or at a reduced rate. It’ll cost a little bit of your pride, but it’s better than getting fleeced with outrageous fees!
3. Rent out a room. I know, it may sound a little odd. If you have a house that would accommodate a guest (like one that has a spare bedroom with its own bathroom), you might want to try this option. College students and young adults are often looking for reasonable housing to offset the costs of school. You can get help from friends and family to interview and choose the right person.
4. Sell your home. Your home is full of memories. I understand that. We’re always creating memories at the Hogan house. But memories won’t pay the bills. If you sell your home, you can downsize—purchase a smaller home or condo—and use the rest of the money for those urgent needs. You may even be able to put some of the money in savings!
I know it’s scary and difficult to make these decisions about your home. You’ve worked hard for so many years to enjoy it during retirement. But don’t let emotions drive you to make a bad decision. Instead, talk with a financial pro who understands your situation and wants to keep you in your home and out of debt. If you need help, we can recommend someone in your area—someone who you can trust. You can still enjoy retirement without losing your house, but you must make the right choices along the way. A reverse mortgage is a really bad choice!