Money Matters

The Pitfalls Of Reverse Mortgages

QUESTION: What are the pitfalls of reverse mortgages?

ANSWER: A reverse mortgage can be a useful tool for those ages 62 or older.  However, my view is that a reverse mortgage should be used as a last resort once you have depleted the majority of your other liquid assets.  Part of the calculation that determines how much you actually receive from a reverse mortgage is based upon your life expectancy.  Furthermore, with housing prices having decreased over the past couple of years, the amount available to extract from your home via a reverse mortgage will have probably declined. Therefore, by delaying the reverse mortgage transaction, it may allow you to receive a greater sum of money due to potentially a higher home value and a shorter life expectancy.  There of course, are exceptions to the rule, and I would look at your individual needs to determine if now is the optimal time to enter into a reverse mortgage transaction.  

An example of a pitfall to be aware of is as follows:

Occasionally, I will hear reverse mortgage brokers suggest that one spouse be taken off title to be able to implement the reverse mortgage sooner.  I believe this to be a dangerous strategy. Should the homeowner that was left on title pass away, the reverse mortgage will become due and payable.  This can potentially force the surviving spouse to sell the home if they not have the sufficient funds available to payoff the balance of the mortgage.

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Money Matters is provided by:

David Schauer, CFA, MSFA, CFP®
Financial Planner
Hanson McClain
E-mail questions to moneymatters@kovr.com

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