Do Reverse Mortgages Deserve Their Bad Rap?

  Many people don’t truly understand reverse mortgages before their bank or lender tries to sell them one. It’s important, however, to go into the process educated. Reverse mortgages aren’t mortgages in the traditional sense. Whereas most mortgages involve borrowing money from a bank, they allow you to tap into the equity you have built up over the years. Your equity will continue to decrease until you leave your home (and thus the mortgage), but as a trade-off, you eliminate or greatly reduce your monthly mortgage payment. In essence, the bank is buying back your home one payment at a time. Reverse mortgages are usually for people who see themselves having difficulty keeping up with their payments as they age. To qualify for one, you must be at least 62 years old. Most lenders have less stringent income requirements, and will have no or reduced closing cost options.

Why the controversy?

Underhanded lenders are almost entirely to blame for all the bad press. Because the downsides of reverse mortgage—like that your heirs will have to buy back the house from the bank should they want it—are easy to gloss over, many seniors end up getting talked into a mortgage that doesn’t suit their needs. In some cases, people have found themselves forced to pay up or leave their home after the death of a spouse who took out a reverse mortgage in just their name. Others have made the mistake of taking a reverse mortgage without understanding the how their interest will be calculated--not good, as interest can accumulate fast under certain circumstances.

The bottom line?

Whether or not you should be wary of a reverse mortgage depends almost completely on how your lender is pitching one to you. If they’re promising free money and leaving out the drawbacks, then you should stay wary. As long as you see a reverse mortgage for what it is—the bank buying back your equity bit by bit—and do your homework (here is a good place to start), then there’s no reason you can’t make one work for you.