Baby Boomers approaching a new and different life stage are often very motivated sellers. So much so that they are willing to get a reverse mortgage—something not always in their best interest.
A reverse mortgage is a loan product marketed aggressively to seniors. A reverse mortgage allows a homeowner to access the equity in their property and receive monthly payments from the bank against the value of the home. The loan is repaid when the borrower dies or is no longer able to live in their home for a period of one year.
On the surface, this can sound appealing to a homeowner who has owned their home for a long time and has accumulated a substantial percentage of equity. Some jump right in without knowing all the facts.
There are several factors to consider when examining whether a reverse mortgage is a right option. Most borrowers aren’t aware of the actual cost of the loan because all of the fees are “rolled” into the loan amount. For instance, mortgage insurance fees amounting to several hundred dollars per month are tacked onto the principal loan amount.
Many seniors enticed by a reverse mortgage don’t realize they will not be able to borrow 100% of their home’s value. The bank will generally lend up to 75 – 80% of the home’s appraised value. They lose 25% right there.
The loan balance increases over time and when the borrower dies or is no longer able to live in the home, the loan becomes due to the bank. This may not seem like an important consideration in the moment, but if the borrower ever needed to enter a nursing home or full-time care facility, the loan would become due.
Health factors are a real risk when considering a reverse mortgage. What if the borrower outlives the equity in their home? Property taxes, insurance, maintenance and repairs are still a monthly cost the owner is responsible for. If they cannot afford to pay these expenses, the bank will foreclose.
Are reverse mortgages all bad? Not for everyone. Reverse mortgages may benefit a certain group of seniors who want to stay in their homes for as long as possible and need to immediately supplement their monthly income. It can be an important funding tool for older seniors who have no heirs or may have other assets in their estate to leave behind.
On the downside, the borrower is only accessing a percentage of the home’s true value and the remaining equity is used to protect the bank’s interest in the property. The remaining equity and any appreciation over the term of the loan are usually wiped out when interest and fees are factored into the payoff amount.
Regrettably many Baby Boomers don’t fully grasp the ramifications. They think a reverse mortgage is better than selling their homes outright because the homeowner receives monthly payments and is able to continue to live in the home. Some act out of desperation. Once they do, it can be too late.
There are significantly better options available to the homeowner when they choose to liquidate the equity. For instance, when selling to an investor, the money received from the sale can be used to downsize to a more manageable home.
Connecting with Baby Boomers will not only increase the likelihood of a win-win situation but can also help minimize the risk for people in the latter years of life, making their lives better in many ways.