Reverse mortgages are one of the retirement planning resources that have gained interest in recent years, particularly as a result of well formulated advertising campaigns that, obviously, highlight the potential benefits while glossing over, or completely ignoring, some of the potential problems.
Wikipedia defines reverse mortgages as a special type of home loan for older homeowners (62 years or older) that requires no monthly payments. Borrowers are still responsible for property taxes and homeowner’s insurance. Reverse mortgages allow elders to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.
These are complex transactions and probably not suitable for the financially unsophisticated. Specific rules for reverse mortgage transactions vary by jurisdiction. In Canada, for example, the borrower must seek independent legal advice before being approved for a reverse mortgage.
Used properly and carefully managed, a reverse mortgage can allow the elderly to smooth out their income and consumption patterns over time, and thus may warrant a place in a well thought out retirement plan.
Some things to think about:
- The fees are often high.
- High interest rates compared to traditional home equity loans.
- Your heirs may not get the house.
- You have to repay the loan if you move out.
Like any other material investment decision, it is important to understand the implications and, it usually pays to consult with your advisor(s).
All comments and suggestions are welcome.
Walter Kirchberger, CFA®
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