<p>While wasting time waiting for a friend at our local Panera, I overheard two older couples at an adjacent table talking about getting a reverse mortgage as a way of helping manage their finances. I have seen ads for them on tv but don’t know any more about them …it sounded to me like they were a variation on a home equity loan, and I was wondering why the couple was not considering that instead. So, the question is why/in what circumstances would people choose one over the other loan vehicle?</p>
<p>The problem with a home equity loan is that it is a loan that needs to get repaid, so you need cash flow for the monthly payments. If the elderly couple don’t have a need for a lump sum now, but just want more each month, the reverse mortgage may be the way to go. Haven’t reached that stage of my life yet to have researched it, so can’t say anything definitive about it.</p>
<p>So a home equity loan would add $50,000 to your bank account tomorrow, and then you would have to make monthly payments of $250 or more or less (just a guess) until the loan is paid off. Where you get that money is your problem.</p>
<p>A reverse mortgage could give you monthly income of $250, I am not sure if this goes on “forever” or until the lender thinks you have run out of equity, but the loan is not paid back until after you die and the loan is repaid from proceeds of the home sale.</p>
<p>Complications include what happens when a married couple takes out a reverse mortgage and one of them dies. If not done correctly the surviving spouse may have to sell the house to repay the loan. I have also heard that reverse mortgages are “expensive” but I have never priced one out to see exactly what that means. I do like the concept.</p>
<p>Hubby and I had a conversation today about this. We wondered what would have happened to people who got a reverse mortgage at the peak of the market, housing prices dropped, and then they passed away. I am guessing the expense of the reverse mortgage protects the lender.</p>
<p>So, would it be advantageous for such an older couple to just take out a home equity loan and park the proceeds in their bank account, and have access to that cash both for their bills and as a source for the monthly payments? for some reason reverse mortgages have always sounded a little, well, unscrupulous to me.
Sort of like swindling from seniors who might not understand everything. But overhearing that conversation today made me curious.</p>
<p>MIL had one, and it was incredibly expensive in terms of fees, mortgage insurance, and interest. Hers was set up as a pay-until-death, but I gather you can also have them pay for a set period. If house values had declined to less than the outstanding mortgage they (the mortgage co? FHA? not sure) would have had to eat the loss. </p>
<p>I’m not sure a HELOC would be any better – a different set of problems.</p>
<p>One problem with reverse mortgages is that sometimes the elderly borrowers don’t really understand that this is a loan. The word is never mentioned in the bright and cheery ads that I’ve seen, and I doubt that it’s emphasized in the sales pitch either. I knew a dear lady who confessed to me, as a dark secret, that she’d gotten a reverse mortgage; she was ashamed of needing it to make ends meet. At that point, she hadn’t told her kids. I don’t know if she ever did, but if not, I can imagine their surprise when they went to sell the house after her death.</p>
<p>I’m certainly no expert, but I doubt that it could be set up as “until death.” I believe that the homeowner can only borrow a certain percentage of the equity, or of assessed value, or some amount applicable to the specific property. It doesn’t make sense that a lender would set you up to potentially borrow more than the house is worth.</p>
<p>In concept, it sounds like a good way for older people to stay in their home by milking the equity. Yea, the heirs get less down the road… but it’s the parents’ money. </p>
<p>I have heard the fees etc are high. In some cases it would make more sense to sell the house and become a renter.</p>
<p>It is indeed the parents’ money and for so many, one of the main purposes of owning a home was to use it as a retirement nest egg. Nothing wrong with that at all. I’m just saying it may be a good idea to let the kids know about a reverse mortgage or a HELOC. There’s no sense in springing a big surprise on them.</p>
<p>Reverse mortgages have HUGE up front costs. We looked into it a few years back for my dad. They were total ripoff.</p>
<p>Thanks for all of the info…I had never really heard much about them. Luckily our older folks were never in need of them. Actually, I don’t think I know anyone who has taken out a reverse mortgage.</p>
<p>" I’m just saying it may be a good idea to let the kids know about a reverse mortgage or a HELOC. There’s no sense in springing a big surprise on them." - That’s a good idea. The kids may have a more savvy way to analyze the options. And someday they may be dealing with the finances / nursing home expenses.</p>