I was inspired to write this from a post at Yet Another Blog About Money.
Reverse mortgages are aimed at older people who have a lot of equity in their homes. The idea is that you mortgage it out to a bank and instead of you making a payment to the bank, they pay you every month. Basically you are making a loan to the bank and they are buying you out of your house. You can receive the distribution as a lump-sum option up front too, but I’m sure the loan product interest rate is calculated to adjust for the present value of the cash, etc.
If you read the link above from the AARP, they have a good set of references that I suggest people read. If you are like me, and have parents who are exploring their housing options please read up. Your folks might have heard of this product and think it’s going to be their regular income, coupled with their Social Security payment and help them cruise through their declining years. I am not so sure.
I think a person should keep their house as long as they can without pulling out equity. Before older folks retire completely, they ought to fix up long-term repairs (like a 20-year roof) while they still have steady income. Large home repairs are difficult to pay once folks are on a fixed income. Retired seniors are ripe for home-repair scammers to con them out of their money.
They are also going to have to plan their property tax burden as well. Say the home is paid off and there’s no more escrow account. The tax man is going to ring once or twice a year asking for property taxes. At this point I bet selling the house and renting sounds pretty good. I bet the reverse mortgage sounds great too since there would be money still coming in. However I see reverse mortgages as eroding wealth accumulation. I feel like it’s a last resort/desperation option and not a bedrock strategy.
I still don’t know the answer to these things, but these are the thoughts I’ve been having lately about aging and finances. I’m nowhere near retirement, but my folks definitely are and decisions we discuss now will have an impact 5, 10, 20 years down the road.
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One of the most common times I’ve seen people move to reverse mortgages is when they reach the point where they are unable to live on their own and need full-time care. In-home care is very expensive and frequently not accounted for in retirement plans. Once people reach the point where they have exhausted their own funds, it’s not uncommon to be faced with a choice between selling the house and using the proceeds to pay for a nursing home, or taking a reverse mortgage and using it to pay for in-home care. I think in that kind of scenario it makes sense, but it’d be foolish to plan on a reverse mortgage as part of your regular retirement income. (Disclaimer: my mom worked in geriatric social work for a while, which is how I’ve seen this scenario play out. This may or may not be a representative sample.)
Thanks for your input Catrijn! It could make a lot of sense to do a reverse mortgage in the right circumstances, but my feeling is that the ‘right circumstances’ is different for everyone and narrowly defined. The better thing to do is to save for retirement and home upkeep.