Some end of the week thoughts on reverse mortgages; are they worth the hype?
Reverse mortgages may seem great from a bird’s eye view. You see them and think, “Wow, no more payments for the rest of my life and money coming out to help pay for my expenses. I don’t even have to particularly qualify other than showing that I can pay for the annual taxes and insurance! What a great deal!”
Unfortunately those promises are misleading. The problem lies within the fact that the loans only go up to a 40% of loan to value. Most of us have a loan close to that. The rate is 4% higher than conventional rates which actually may eat up your equity twice as fast.
A more practical alternative is to simply get an equity loan on your house that goes up to 90%. You can write yourself a monthly check and this will last much longer because of the higher loan to value that is available to you. Furthermore, there is no upfront costs to the equity loan option (other than 3rd party costs such as title insurance). Brokers that sell reverse mortgages typically target senior citizens and they are getting rich doing so due to the many upfront costs. The typical rates for an equity line is about 3.75% and the interest rate on a reverse mortgage is about 7.5%.
In my personal opinion, the only way one should take a reverse mortgage is if one they are in desperate need of monthly income, they have plenty of equity, cannot qualify for some type of conventional financing and they take a life insurance policy paid for by the monthly draws that will pay off the loan when the borrower passes so you don’t eat up all the equity allotted to your heirs.