Every day we see TV personalities telling elderly folks that the solution to their debt problems are reverse mortgages. They make it sound like it is the ideal way of getting something for nothing…you just need to be 62 years of age or older; own a home and banks will give you money. You don’t need to show how you will repay the loan, because the banks pay you. Does that sound too good to be true? IT IS!

 

Personally I believe reverse mortgages are the worst con played on our elderly. It feeds on our insecurities and wishes to remain in a place we know - our home. But unfortunately our twilight years are neither simple nor predictable. For most Americans, our home is our biggest asset and once gone most are just left with Social Security that for most barely cover living expenses.

 

A Reverse Mortgage is a loan…not a welfare plan. The loan can be for about 50% or less of the value of the home. The older you are the greater the loan to value ratio because our average life expectancy is about 78 years

 

They say this is a great program for the elderly, but in reality it is a great plan for the banks. In a conventional 30 year mortgage the first 15 years of the mortgage we pay mostly interest and the remaining 15 years we pay mostly principal until the loan is paid. The lower the balance the smaller the interest payment.

 

In a reverse mortgage is the opposite - the principal is continuously increasing because the balance goes up daily by the amount of the interest owed. In a conventional mortgage the equity is increasing as you pay down the mortgage while in a reverse mortgage the equity is decreasing at a rapid pace because the balance is constantly increasing by the interest.

 

The homeowner is still responsible to pay taxes, insurance and maintenance - if the homeowner fails to pay these expenses he/she may be in default and either forced to pay or foreclosed. If the homeowner decides to sell or refinance he/she must payoff the balance - if the balance is greater than the value of the house, the bank may take the property or all the proceeds from the sale.

 

A trend I often see with elderly homeowners is that they reach a point where they can’t keep up with the maintenance and the house starts deteriorating fast. Of course anyone driving by can see that the house is not being maintained and they become the target of conmen who swindle the elderly by offering to do cheap repairs. Of course they often run away with their money and don’t do the repairs and the house continues to deteriorate until zoning enforcement is called -- then start the big problems that often lead to the elderly person losing their home.

 

As we get older things can change in a blink of an eye - the best alternative for elderly people is to have cash rather than assets. To give you an example; years ago we cared for my wife’s parents who lived in their own house about 10 minutes from us. One morning we received a call from my brother in law to tell us that he found their mother on the floor with a compounded leg fracture. We ran over and called rescue - by that evening when they were done with her surgery we received a call from my wife’s niece who had stayed with my father in law – “Please come immediately because Dida fell and I can’t pick him up.” As result of the morning’s event, he suffered a stroke. We called rescue again and that night both were in the hospital. That’s how quickly things can change with the elderly.

 

There are much better options than reverse mortgages. Best option is not to become attached to the property and sell before it becomes a burden. It is better to sell the property and deposit the proceeds in a money market account or certificate of deposit. Even if you are getting less than1% interest, you’re ahead because it is actually earning rather than eroding value of your assets as happens with a reverse mortgage.

 

A selling point used in marketing a reverse mortgages is that there is a tax benefit because it is a loan, however you may just be passing on the taxes to the estate.

 

When you sell your primary home you don’t pay taxes on the first $250,000 profit if you are single or $500,000 if you’re married. If a spouse dies before the sale of the house, you can prorate the dead spouse’s profit to reduce taxes….a tax accountant can help you with those details. Any profits above those limits pay 15% capital gains tax – you may want to check with your accountant because these rates may change in 2012.

 

You can also sell your house with a leaseback provision that may allow you to remain in the house as a renter without the worries or expenses of property taxes, insurance and or maintenance. You may also be able to take back a 50% balloon first mortgage and pay your rent with the income from the mortgage. If the lease rates become too high, you can always move. The most important thing to remember is that a REVERSE mortgage erodes the equity in your asset twice as fast as any other form of mortgage and you have options to reverse mortgages that may be more beneficial to you. Call me at 305 510-0647 if you want to discuss your options.