Brrrr….
While I don’t mind the snow, this chilly stuff does wear on one’s soul… a cold day to swap out my bumper stickers. For those who don’t know, I change my bumper stickers bi-monthly or so by way of these handy little sleeves made just for that purpose. The current ones read: “A Man is NOT a Financial Plan” and “I dream of a world where chickens can cross the road without having their motives questioned.” I own 30 or 40 bumper stickers so it isn’t a surprise that I have some that strike a nerve… “Ask your doctor” from above (in reference to all those adds for reverse mortgages) made the rotation last spring.
Am I the only one who sees some irony in the fact that an alleged water thief pitches reverse mortgages after making a career of playing private investigators and cops on TV? Oops, that must be the cynical cold seeping in. Let’s get back on track. Reverse mortgages. By some accounts, the first arrangements of this sort date back to somewhere in New England in the early 60’s. At their core, they are a way for someone to use the equity in their home to live on then the accumulated debt is cleared when the house is sold. Over the next 30 years or so, the idea morphed, essentially without regulation, and became a real cesspool of greed and sad stories of people losing both their homes and any cash they might have realized from selling their homes. Plagued by exorbitant fees, undisclosed charges, and unfavorable interest rates, the government finally stepped in and began regulating the industry in the mid 1990’s. More changes arrived starting about 2010 so that what we have now has some structure and isn’t quite as felonious as the loans of the past.
That’s the background, so let’s look at the operations. Right off the bat, you have to be at least age 62 and hold no mortgage on the property in question. When you put a reverse mortgage in place you are basically taking a long-term home equity loan that is paid back when you sell the house (as opposed to monthly payments). There are closing costs, just like a mortgage, and you pay interest on the borrowed amount, just like a mortgage. You are still responsible for the taxes, homeowner’s insurance, and general maintenance since you still own the home. The most you can borrow is between 40% & 60% of the appraised value and three factors go into calculating that amount: the age of the youngest person on the deed, current interest rates, and the value of your home.
In a refreshing move, the new regulations require that you go through some counseling to ensure you understand the pros and cons of the agreement you are undertaking. Cons, you say, what cons are those?? First, there are closing costs, so you should plan on staying in your home a good long time. Second, let’s say you change your mind three years in – you can pay back the interest but eliminating the loan so that the house is free and clear again can be problematic. Third, let’s say you do need to move. The equity in your home is greatly reduced which leaves you with a lot less to get into a new home. This can be an issue if you are going to have trouble securing a mortgage on the new place. Moreover, if you are on any “needs-based” programs, while the reverse mortgage payments aren’t taxable income, they can impact your ability to qualify for these programs.
Everyone’s situation is different so I’m certainly not going to say that securing one of these loans is a good or bad choice. What I would say is it shouldn’t be your first, or even your second choice. It’s important to do all the appropriate legwork to analyze your current financial situation, even if that means tackling some uncomfortable and/or taboo financial topics at the dining room table with your partner and/or family. If you are having money issues, this is not a panacea – just a little frosting holding together the cake crumbs that will eventually harden and fall apart anyway. Of course, if you need a referee for those conversations, let me know and I’ll bring my whistle and red cards (a reference for you football fans – the real football not the silly American version). Think long and hard about the WHY of why you are putting something like this in place rather than the solution itself.
In closing I’ll leave you with another favorite in my bumper sticker rotation: Haikus confuse me // Too often they make no sense // Hand me the pliers.