If you've heard about reverse mortgages and are curious about them, you're not alone. They've been growing in prominence and popularity lately. Here are some stats on the matter, from a 2006 survey by the folks at Harris Interactive.
- Among senior citizens, 41% have heard of reverse mortgages, and 4% have considered signing up for one. That 4% might not seem like much, but it's one out of every 25 seniors.
- Of those who said they've heard of reverse mortgages, 44% said they don't know enough about to have an opinion on them. Of those with an opinion, 54% viewed reverse mortgages favorably, 20% unfavorably.
Odds are, you're among those who don't know too much about reverse mortgages, so permit me to shed some light. A reverse mortgage is a way to augment retirement income. Here's basically how it works: The homeowner gets cash from the lender (a lump sum, a monthly cash advance, a line of credit, or some combination) and makes no mortgage payments for as long as he or she occupies the home. Reverse mortgages are offered by, among others, the Department of Housing and Urban Development and by Fannie Mae
With a reverse mortgage, you're essentially taking out a big loan and using your home as collateral. You can take the money as monthly payments, a lump sum, a line of credit, or a combination of these. When you die or sell the home, the loan comes due, and the home is often sold to pay back the loan. The main benefit is that you get some income during your retirement years. The main drawback is that you end up with little or no house to pass on to your heirs.
Don't run out the door after a reverse mortgage just yet. There are age requirements (all homeowners on the deed must be at least 62), equity requirements, loan limits, and pretty steep up-front fees. There are also some protections in place for homeowners who wish to go the reverse-mortgage route.
My parents were recently invited to a free "seminar" (along with a complimentary meal) to learn more about reverse mortgages. I tagged along. I knew the basics about reverse mortgages but was interested in learning more. Here are some things I was told at the seminar:
- The people giving the seminar make money by processing reverse mortgages.
- When you have a reverse mortgage, you must still pay your property taxes, home insurance, maintenance, and upkeep. You still own your home.
- There are no government-insured fixed-rate reverse mortgages. They're all variable-rate.
The whole presentation was clearly a sales pitch. The language was loaded: "Receive TAX-FREE CASH which can be used for ANY reason!" Fear was used as a motivator, too.
When I hear what clearly seems to me to be one side of a story, I like to look up the rest of the story. I did so with reverse mortgages by reading up on them in our Rule Your Retirement newsletter service, where Doug Short explained a bunch of interesting things about them. For example, he wrote, "Up-front costs for a reverse mortgage are higher than those of traditional mortgages to cover the additional risks assumed by the lender (i.e., the house declines in value or an owner lives significantly longer than actuarial tables predict)." The costs do indeed seem steep to me -- typically between 6% and 12% of the sum borrowed. And here's a key detail: "Once the mortgage is in place, the amount owed generally grows over time as interest accrues on the loan."
So should you dismiss reverse mortgages now? Not necessarily. For some people in some situations, they can make sense. Your best bet is to learn more. Doug offered these handy resources, not all of which are unbiased:
- The Federal Trade Commission on reverse mortgages
- AARP on reverse mortgages
- The National Reverse Mortgage Lenders Association
To these, I'll add:
Optimize your retirement
There are a lot of other retirement considerations worth exploring. Do yourself a favor and check out Rule Your Retirement, headed up by Robert Brokamp. It's the retirement information resource I refer to most often. (A free trial will give you access to all past issues.) In the July issue, Robert offered a few surprising factoids. For one thing, it seems that you can add a full 15% in after-tax wealth to your portfolio by knowing which assets to put in your retirement accounts and which to keep out of them. I hadn't known that the number was so high, though I do realize, as Robert explained in the January issue, that factors such as the tax-efficiency of various investments should dictate to some degree where you park them. In that issue, Robert tackled asset allocation and explained how we can "avoid Uncle Sam's grabby hands." He listed a host of popular investments, such as bonds and dividend-paying stocks, in order of tax efficiency. If you pay attention to information such as this, you may end up not needing a reverse mortgage!
Here's to a happier portfolio! (And hey -- consider forwarding this article to anyone whose financial future you care about. Just click on the "Email This Page" link near the top or bottom of the page.)
These articles may also be of interest:
- Can You Retire in 2016?
- Prepare for a Gruesome Retirement
- $1 Million May Not Be Enough
- 9 Retirement Killers
Longtime Fool contributor Selena Maranjian owns shares of no company mentioned herein, and was recently ranked 1,106 out of 12,898 participants in Motley Fool CAPS, the Fool's new stock-rating community. Her favorite discussion boards include Book Club, Eclectic Library, Television Banter and Card & Board Games.For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . Fannie Mae is a Motley Fool Inside Value pick. The Motley Fool isFools writing for Fools.