How Do Reverse Mortgages Work?
A reverse mortgage is a loan – money borrowed from someone else that accrues interest and must be paid back. Reverse mortgages are the same as regular home mortgages in that they come with a lot of fees, accrue a lot of interest over the years, and can result in you losing your home if you do not keep up with all the requirements of the loan. They are different in that you can only take out a reverse mortgage after you turn 62, you do not make regular payments, and you must have already paid off (at least most of) your original mortgage to qualify.
Like all loans, a reverse mortgage does have to be paid back in full eventually. However, there are no required monthly payments. Unfortunately, this means the balance of the loan continues to increase month-after-month because of the interest added on and because of monthly servicing fees. So, your equity in your house decreases each month instead of increases. (Maybe that’s why they use the word “reverse”.)
When does the loan get paid back if you don’t make regular payments? Usually, it’s when the owner moves out of the house, or (even more commonly) dies. Then the whole loan has to be paid back in full pretty quickly! In the event of death, it means the homeowners’ heirs are the ones on the clock, required to sell the house quickly to pay back the full loan balance with all those interest charges and fees included.
Charlotte Kibby found out how horrible a reverse mortgage can be when one company sold her house for failure to meet requirements…while she was still living in it! Back in 2017, her reverse mortgage provider sent her a notice warning her that she was failing to meet the requirements of the loan by not living in the residence. The problem was, Kibby did still live in her house! The mortgage company started driving by the building to see if it looked lived in. On several occasions, they drove by and reported no one living in the house. When Kibby got lawyers involved, they discovered these “drive bys” were viewing the wrong building! They had been observing the abandoned restaurant next door. Even though Kibby called the company so they could correct their mistake, they still sold her house right out from under her!
In most cases, a house is a person’s greatest asset. Putting it on the line for a costly loan is an enormous risk. Unfortunately, many people are enticed by money now and choose to ignore the consequences. That’s why the debt industry exists. Even more unfortunately, the massive size of the loan and the extreme level of risk aren’t enough to deter them. 1 in 10 reverse mortgages are in default or being foreclosed on. Imagine having your house sold out from under you! Of course, reverse mortgage companies are going to gloss over all that risk as much as possible to sell you their product.
Want to find out a smarter way to hold onto your cash instead of borrowing against your greatest asset? Schedule an appointment with a financial coach today to get started.
