Why Reverse Mortgages Are Not a Retirement Option
Everyone has seen how housing prices have taken a nosedive in most markets across America since the start of the 2008 recession. Almost $3 trillion worth of equity has disappeared, and homes are now worth significantly less than what their owners paid for them. This evaporation of equity has dealt a devastating blow to many elderly Americans who were originally planning on tapping into that equity to supplement their retirement through reverse mortgages.
The truth is that reverse mortgages shouldn’t be used as a last minute tool to fund your retirement. Unfortunately, the lack of homeowners’ equity and a host of other factors have made reverse mortgages a thing of the past as a retirement option.
What is a reverse mortgage?
A reverse mortgage is much like a standard mortgage for your home. It is called a reverse mortgage because the homeowner will receive a cash payment based on the amount of equity he or she has in their home. So, after you finally get your home mortgage paid off and you own your home free and clear, you can go back into debt again for the exact same house with a reverse mortgage.
In contrast to a conventional mortgage, however, there is no repayment requirement as long as the homeowner meets certain requirements, such as continuing to use the home as his or her primary residence. Once the borrower dies, the loan must be repaid.
Reverse mortgages require equity
One of the biggest realizations to come out of the current housing crisis is that reverse mortgages require homeowners to have equity in their homes. If you’ve been banking on a reverse mortgage to fund your retirement instead of investing for your financial goals that you should be been doing all long, you could be in for a rude awakening if the equity in your home has vanished.
This is exactly what happened during the recent (and ongoing) housing crisis, and many Baby Boomers and retirees have been left in a tough situation with little in the way of retirement savings and a hope of using home equity and a reverse mortgage to fund their retirement dreams. But, when the equity disappeared, so did their ability to borrow against their home for retirement. Traditionally, homeowners thought that home prices would rise forever, but that has proven not to be the case in recent years.
Reverse mortgages can hurt your heirs
When you borrow against your home equity to cover living expenses in retirement, you’re putting your heirs at risk of some serious estate planning consequences. When you die, your reverse mortgage must be repaid. Many estates do this either with insurance proceeds or by selling the primary home that was mortgaged. This can be devastating news to family members who may have been counting on those funds for one reason or another — e.g., daily living expenses, paying for a future college education, or paying off other debts of the deceased. Reverse mortgages also have the potential to forcing the sale of homes that have been in families for generations.
Reverse mortgages aren’t a substitute investing
When home prices in America were skyrocketing, many people skipped funding their retirement accounts in favor of buying a bigger home and paying down their mortgage. The trouble with this is that you really need to have a well-rounded financial plan that includes investing for retirement and other goals, saving, paying down debts, and protecting yourself and your family with insurance. Banking on the ability to borrow against the equity in your home during your retirement years is a very risky strategy that can blow up in your face.
Reverse mortgages are expensive
Historically, reverse mortgage are very expensive because of very high fees. These fees erode the value of what little equity you have built up in your home. Like all home loans, there is an origination fee, appraisal fees, closing costs, insurance, and a host of other fees that are tacked onto your reverse mortgage. Because of this plethora of fees, the cash payout that you receive in this depressed housing market will be even further reduced.
In the final analysis, there’s no better alternative to investing for retirement than a well-balanced portfolio of stocks, bonds, and/or mutual funds. Using your home as a way to fund your retirement dreams is fraught with potential drawbacks, and the expectation that you’ll have a ton of equity at retirement is based on the faulty assumption that your home will necessarily increase in value, or at least retain its current value.
Do you have any experience with reverse mortgages? Has your declining home value now made a reverse mortgage impossible? I’d love to hear your thoughts in the comments section.
Modified on November 7th, 2011 - 9 Comments
Filed under: Mortgages, Retirement
About the author: Hank Coleman is a freelance writer who has written extensively for many financial websites and publications. Hank holds a Master's Degree in Finance and is actively pursuing Certified Financial Planner status.
Related articles...
» When is a Reverse Mortgage a Good Idea?» 40 Year Mortgages Going Mainstream
» Reverse ABA Routing Number Lookup
» Vanguard Changes Target Retirement Fund Offerings
» Worried About Running Out of Money in Retirement?
» Pay Off Your Mortgage With 401(k) Funds?
» Retirement Savings Options, Part I
» Paying Credit Cards Instead of Mortgages?
Was this article useful? Please sign up to receive our content via e-mail:
9 Responses to “Why Reverse Mortgages Are Not a Retirement Option”
Leave a Reply
Top Cards by Category
0% intro APR on purchases and balance transfers for 15 months, then the variable standard purchase APR of 10.99% - 19.99%.* Earn 2% cashback automatically at gas stations and restaurants. Great rewards with no annual fee, no rewards redemption fee, and no additional card fee.
Earn 30,000 bonus miles toward Award Travel when you spend $500 on the Card in the first three months from account opening. Receive double miles on Delta purchases.
Earn 30,000 bonus miles toward Award Travel when you spend $500 on the Card in the first three months from account opening. Receive double miles on Delta purchases.
Earn up to 5% cash back* in categories that change and enjoy a 0% introductory rate for 15 months on Balance Transfers and 15 months on Purchases.
Earn up to 5% cash back* in categories that change and enjoy a 0% introductory rate for 15 months on Balance Transfers and 15 months on Purchases.
Enjoy a 0% introductory rate for 18 months on Balance Transfers and 6 months on Purchases. Earn up to 5% cash back in categories that change.
For a limited time earn 25,000 Membership Rewards(R) points by spending $5,000 in the first 3 months. Enjoy amenities for you and your business, like: complimentary airport club access to 600 partner lounges, 24/7 concierge service and dedicated business consultants.
0% intro APR on purchases for 9 months, then the variable standard purchase APR of 12.99% - 18.99%*. 5% Cashback Bonus in categories that change like gas, restaurants, department stores and more. Limitations apply*. Up to 1% unlimited Cashback Bonus on everything else. No annual fee.
Earn 3X points on airfare, 2X points on gas and groceries, and 1X point on everything else.
This is a prepaid reloadable debit card with a rewards program. No credit check needed and no activation fee. There is a $4.95 monthly fee, reduced to $0.99 monthly if you load $500 each month.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math
- Dish Network Customer Service SUCKS
- $8,000 Homebuyer Tax Credit
- Pay Off Mortgage Early or Invest?
- How to Claim the First-Time Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- $15,000 Homebuyer Tax Credit
- Ethanol Blended Gas = Lower Mileage?
- Termite Control: Sentricon vs. Termidor
- How Much Should You Pay a Babysitter?
- Will Mac OS X Lion Kill Quicken 2007?
- Federal Income Tax Rates Went Down but Your Federal Tax Withholding Increased. Here's Why...
How to save money on insurance
- Being Too Frugal Can End Up Costing You Money
- Check Fraud: Use a Shredder -- and Hope Everyone Else Does, Too!
- HSA Contribution Limits for 2013
- How to Close an Ally CD Early
- Seven Ways to Make Big Bucks at Your Garage Sale
- What's the Lowest Possible Credit Score?
- $250 Signup Bonus from Citi ThankYou Preferred
- How to Help Your Family Financially - and Stay Sane
- Average Price of a New Car?
- Lending Club Recovered Funds from Defaulted Loans
October 27th, 2011 at 11:12 am
Interesting, I always wondered what a reverse mortgage was/how it worked.
Heirs, however, should not be a consideration for not taking one out. Heirs should not be depending on an inheritance, it should be a windfall.
For the generation that is close to retirement, or recently retired, I can see how this option is something they have to consider – especially if their retirement portfolios have taken a beating. Certainly, the 20-30some crowd should not be considering a reverse mortgage as a retirement plan..
Either the heirs give back and provide financial support, if for no other reason than to protect their inheritance, or a reverse mortgage may be the only other option for some.
October 27th, 2011 at 11:27 am
I agree that everyone should be saving/investing as the years go by and should not rely entirely on home equity to fund their retirement. However, I disagree that people should not consider how they might use their home equity to fund their needs.
Also, I strongly disagree that a reverse mortgage should not be considered since it will likely reduce inheritance. So what? People have to cover their own needs first. Would you suggest retired people avoid spending a single penny so that they can leave more to their heirs when they die? If you wouldn’t, then your advice here is inconsistent.
A reverse mortgage is merely one tool which might be used. If a reverse mortgage will improve one’s financial circumstances, then it should be considered.
October 27th, 2011 at 12:32 pm
I view a reverse mortgage as an easy way to liquidate my house, if I’m not planning to leave it behind. I get regular monthly payments, plus I can stay in it till I die. While it should not be the sole retirement plan, it is definitely a useful addition for some, just like Social Security.
October 27th, 2011 at 12:59 pm
In specific cases, like Srinath above, a reverse mortgage might make sense. Say you bought a home in the 50s or 60s and are now retired with your retirement funds running out. A reverse mortgage that generates a positive cashflow will see you through the the next couple of decades might make sense. Ofcourse, you have to forego the house to the bank at the end as there is no way you will be able to have the money and the house as well. It may make sounder financial sense to sell the big home and move into a smaller home and live out retirement there.
If you are getting a reverse mortgage to fund college or buy a car I have just 2 words: Good Luck!
October 27th, 2011 at 4:45 pm
I consider a reverse mortgage to be a last resort if you’re retirement age and having difficulty paying your bills and have no other assets. I know of one friend of my in-laws with a reverse mortgage and his equity got him a few hundred extra a month in addition to his small social security check and helped him pay the bills. He’s in his 80’s with medical issues. It worked well for him.
October 28th, 2011 at 10:11 am
I have to agree with the others that your heirs should be one of the lowest priorities on your list of considerations when looking at a reverse mortgage.
Generally reversed mortgages are limited in the loan to value ratio they can lend, and it’s you’re money that you have tied up sitting there doing nothing so why not enjoy it?
Maybe instead of leaving your heirs with an empty house you could use the money to spend more time with them while you’re alive and having some great experiences together. That’s far more valuable than a pile of sticks that keeps rain off your head.
October 29th, 2011 at 10:47 am
I began looking into reverse mortgages a few years ago…My Dad had a pension which my Mother still lives on. When Dad died the sale of the condo went to Mom so she can live in a nice assisted living facility. I don’t expect to see any of the money my father worked for,when my Mom goes.
I feel reverse mortgages are the same thing. Like my Dad I did, and still am,saving DURING my newly entered retirement. I too have a pension and am living within or below my means. That’s something many of the 20-30 somethings don’t understand.
October 29th, 2011 at 2:13 pm
After living in my home for 4 years I re-financed and took out a reverse mortgage. I had to bring cash to the table from my previously paid off prior home but still have a lot left. But I now have no payments and my kids would not want to maintain or use this place. I figured the break even point for cash/payments/fees is 12 years. (11 to go!) I lived in my last place for 18 yrs and just love this smaller ranch with the perfect layout and neighborhood. I am very pleased with my financial plan. It does take the right circumstances but it seems to fit very well for me. I look at the situation as buying a home for half price by paying cash. If I live another 20-25 years I’m way ahead of the game and no banks to deal with….ever.
November 14th, 2011 at 1:04 pm
Reverse Mortgage, or nothing else, will EVER work out if on one hand you have enough equity to do it, and on the other hand, you have a greedy hand ready to take half of your money. I approached the age and equity to do a Reverse Mortgage, but unfortunately housing value fell to the point of wiping out all my equity and put me under water. Greed has grown rampant in this country and all over the world. They pile on too much fees which make me not want to do a Reverse Mortgage. I should get 99% of my money, they should get 1%. Instead, they get 50%. PLEASE DON’T VOTE FOR OBAMA! Why? Because his policy did not address the problem of us elderly who are the worst victim of this housing crisis. In other words, I feel robbed of my investment (my down payment) put into my home. I am an African American and I appeal to other AA, DO NOT VOTE FOR OBAMA because he is black like you. Look beyond race. VOTE for someone you feel can get us out of this mess, who is capable of restoring our country back to the great county it USE to be. Obama is NOT capable!