Thousands are financing retirement with debt
from daveramsey.com on 29 Jun 2010
You may have heard that a reverse mortgage will give you a “lifetime income” or you’ll “never lose your home.” These misleading claims helped lenders convince nearly 115,000 people to buy one of the worst financial products out there in 2009.
Back Into Debt
Financing retirement with debt is a big mistake! You can’t win with money by going into debt—especially when you’re older.
Reverse mortgages, or Home Equity Conversion Mortgages (HECM), are available to homeowners who are at least 62 years old. The loan taps your home’s equity, and the bank gives you the money either as a lump sum, a line of credit, or a monthly draw.
You still pay for property taxes, insurance and the costs of maintaining the home. The lender can foreclose if you don’t. Also, because interest accrues over the life of the loan, your debt can ultimately exceed the value of your home.
You don’t make monthly payments, but if you sell the house or move out for more than a year, the loan is due and the income stops. If the house is sold upon your death, proceeds go to pay the loan.
Fees on a reverse mortgage are expensive and can cost you 10% or more of the loan amount. You’ll pay:
- An origination fee
- Standard closing costs
- Mortgage insurance premiums for coverage to make up the difference if your home doesn’t sell for enough to pay the loan
- A monthly mortgage insurance servicing fee
- Fees for mandatory credit counseling, which you pay whether or not you get the reverse mortgage
Interest rates on a reverse mortgage are adjustable unless you take your money in a lump sum. You are also required to take a loan for the maximum amount you qualify for.
The Lies Revealed
The U.S. Government Accountability Office last year found dozens of misleading marketing claims about reverse mortgages in materials distributed by several large lenders. We’ve already debunked the first two:
- Lifetime income – Income from a reverse mortgage stops if you sell your house or move.
- Never lose your home – You can lose your home if you can’t afford to pay taxes, insurance, or maintain the home.
- Never owe more than the value of your home – If your loan exceeds the value of your home, you or your heirs will have to make up the difference if the home isn’t sold when the loan is due.
- False implications that a reverse mortgage is a government benefit rather than a loan – Some lenders even use government logos to convince you to buy.
If you or anyone you know is considering a reverse mortgage—stop now! If money is short, cut back on your lifestyle. Sell your house and get something more affordable to free up money for your needs.