November 30, 2017 by HECM Pro
So, is a reverse mortgage a ripoff? Well, that depends! It depends on your definition of a ripoff, whether or not a reverse mortgage makes sense for your financial goals and situation, and whether or not you get a fair deal from a reverse mortgage lender.
I can’t say for sure if a reverse mortgage is a ripoff for you, but I can provide information about the program and let you decide for yourself if a reverse mortgage might be beneficial.
What is a Reverse Mortgage?
The purpose of a reverse mortgage is to allow seniors to tap into their home’s equity and live better and more financially secure in retirement.
The most common reverse mortgage product in the United States today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If you know somebody who got a reverse mortgage, it’s very likely it was a HECM.
The HECM reverse mortgage is designed to give homeowners 62 or older the ability to convert a large portion of their home’s value into tax-free cash without taking on a mortgage payment or giving up ownership of the home.
There are ways to convert home equity into cash in retirement without a reverse mortgage. The typical choices are to either sell the home and cash out all your equity (which means you have to find a new home) or do a cash out refinance and be stuck with mortgage payments for the next 30 years. Obviously, neither option is appealing if your goal is to increase your available financial resources while living in your home. That’s where the HECM reverse mortgage comes in!
The following are some notable features of the HECM:
- No monthly payments are required and the money does not need to be repaid as long as at least one borrower is living in the home and paying required property charges (property taxes, homeowner’s insurance).
- You remain the owner of the home and are free to will it to your heirs.
- HECM proceeds are not subject to income taxes and do not impact Social Security retirement or Medicare benefits.
- The HECM is non-recourse, meaning you, your estate, or your heirs will never have to repay any more than the value of the home regardless of how much you borrow. FHA picks up any shortage if there’s not enough value in the home to repay the entire balance.
- The HECM program was created by the federal government and is insured and regulated by FHA.
The HECM can be tailored to meet your specific financial goals; proceeds can be received in the form of a monthly term or tenure “paycheck”, lump sum, line of credit, or some combination of all of these options. Proceeds are commonly used by reverse mortgage borrowers to:
- Eliminate existing mortgage payments
- Eliminate other debts, such as credit cards and auto loans
- Finance home improvements
- Supplement retirement income
- Pay off medical bills
- Increase liquid retirement assets
- Set up a rainy day or emergency fund
- Take a vacation
Again, your obligations under the HECM program are simply to pay your real estate taxes, homeowners insurance, and live in the home as your primary residence. As long as you do these things, no monthly mortgage payment is required and the loan does not have to be repaid.
The “Useless” Asset
So, is a reverse mortgage a ripoff? Well, if it would be beneficial for you to be able to access that hard-earned “savings account” called home equity, then it’s probably not a ripoff.
Now think about your home’s equity for a moment. What can you use it for? What practical impact does it have on your life? Whether you have a dollar or a million dollars worth of home equity, how does it benefit your daily life in a tangible way?
If you’re retired and have no plans to sell your home, the amount of home equity you have is pretty much just a number on paper. It might be a very nice number, but it has little to no impact on your retirement lifestyle. You can’t take your home equity to the store to buy groceries, a nice restaurant for a steak dinner, or use it to buy gifts for your grandchildren.
Case in point: there are seniors right now living in paid off homes worth more than a million dollars in the San Francisco Bay area that are barely scraping by on Social Security. They’re technically millionaires, but they can barely afford to pay the light bill!
So, you busted your tail for decades, made mortgage payments month in and month out, kept up with your property taxes, fixed things when they broke, and maybe even upgraded your home a bit. Maybe you got lucky and your home even went up in value since you bought it.
Why not put that equity to work to live a better and more financially secure lifestyle in retirement? Perhaps you can add to your income, supplement your available retirement assets, pay off some bills, or eliminate a burdensome mortgage payment.
That’s what the HECM reverse mortgage does.
Is a Reverse Mortgage a Ripoff?
I think the answer to the question is a reverse mortgage a ripoff? comes down to this: does the reverse mortgage improve your financial situation? Does it make your life better? If not, then it’s a bad deal – perhaps even a ripoff. The only people who would benefit from the reverse mortgage would be the lender and other service providers who helped to write the loan for you.
However, if a reverse mortgage puts you in a better financial position, meaning you live a better and more financially secure lifestyle in retirement, then it’s definitely not a ripoff. In fact, it could even be life-changing in a very positive way.
A Common Complaint
Having said all this, I want to be up front about one common complaint about reverse mortgages: the closing costs.
Yes, closing costs for a reverse mortgage can be higher – even substantially higher – than a traditional forward mortgage, but it doesn’t mean they actually will be. And even if they are, it’s important to note that they typically don’t have to be paid out of pocket. The vast majority of closing costs are just rolled into the new loan amount and repaid when the entire loan balance is paid back in the future.
Yes, the closing costs can be higher, but they’re not anything you’ll have to pay back in this lifetime if you live in your home for the rest of your life.
Decide For Yourself
The reverse mortgage is a fantastic and legitimate loan program, but it’s not perfect for everybody. If it’s not right for you, then it’s probably a bad deal. Maybe it even rises to the level of “ripoff”. Who knows?
However, if a reverse mortgage benefits you, then the answer to the question is a reverse mortgage a ripoff? is a resounding no.