“They’re good for some people” – that’s how most columns about Reverse Mortgages start. Maybe that’s true. Maybe a Reverse Mortgage is perfect for someone in some very specific financial situation.
But the question should really be, “Are Reverse Mortgages good for most people?” And “Would a Reverse Mortgage good for you?”
Because there are many financial products that have been proven over decades to be good for most people. To name only two – hundreds of millions of people have benefited handsomely from having home mortgages. And, more recently, millions have made excellent use of home equity loans.
Reverse Mortgages, on the other hand, are so potentially financially-devastating and complicated that the Federal government requires people applying for Federally-insured Reverse Mortgages to meet with an independent government-approved counselor before they can proceed!
A “Reverse Mortgage” sounds like such a great idea … and it’s very cleverly named. Instead of making payments, a homeowner gets money coming in. But it’s easy to wonder if a Reverse Mortgage would have the same appeal if it was called an “Equity Eraser.” Probably not. But – too often – that’s what they are.
Sure, a Reverse Mortgage “allows a homeowner to access a portion of their home equity as cash,” as the Consumer Financial Protection Bureau explains.
But Reverse Mortgages aren’t “free” money. According to the Federal Trade Commission, some things to consider with a Reverse Mortgage include: “You are still responsible for property taxes, insurance, utilities, heating fuel and maintenance on your home,” “You owe more over time,” “Reverse Mortgage interest is not tax-deductible” and “Using up the equity in your home with a Reverse Mortgage means fewer assets for you and your heirs.”
There are financial advisors who make the case for Reverse Mortgages. A recent Wall Street Journal article suggested taking out a Reverse Mortgage to pay off an existing mortgage. Or using a Reverse Mortgage to pay the taxes due on a Roth IRA conversion. Those are two very complicated plays that might also possibly be right for someone out there. Probably not a good idea for most people.
Usually older homeowners start thinking about Reverse Mortgages when they’re short on money. For house repairs, a regular home equity loan gets most people in that situation the money they need. If paying property taxes is the trouble, there are property tax deferral programs.
Sometimes a homeowner’s cash crunch is so extreme that the best way out is to sell the house, keep all of the equity and move forward without the burden of property upkeep expenses that are absolutely still there with a Reverse Mortgage.
TV commercials make it seem like a Reverse Mortgage is a simple solution. Too often, it’s just a new problem.
If you’re a homeowner with money worries, talk to your local banker and/or an independent financial advisor about Reverse Mortgage alternatives that actually do work for most people. You won’t see them advertised on TV. But they exist. And one might be just right for you.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to info@cantoncoopbank.com.