It’s a commonly quoted statistic that nearly half of American families have no retirement savings. For many people facing retirement, their homes may be the only asset they have to help fund their post career living expenses. Over the last few years there have been a lot of stories about reverse mortgages where retirees sell their homes to the bank in exchange for cash or income over the course of their life. There are several ways the homeowners can be paid out – a lump sum, a monthly annuity, or a line of credit.
Are these a good deal? They may be advantageous from an ease of acquisition, interest rate and from a planning perspective when compared with a home equity loan or a home equity line of credit against the homeowner’s house for an elderly individual with no income other than social security. They can be a good deal in a few situations – namely under very specific circumstances, if someone remains in their life for longer than their life expectancy, then they may be able to “beat” the bank, however this is a very rare occurrence. When distributed, the income or advances are generally not treated as taxable income, although they may be treated as assets against Medicare eligibility.
While there are some benefits to reverse mortgages, they are expensive and complex transactions. The valuations on lump sums or annuities are generally pretty low. Lines of credit are generally the most popular, and on paper, generally appear to be the most favorable options in terms of balances. The cash taken from the line of credit from a reverse mortgage is treated as a loan advance, and the interest on the advance continues to compound against the balance of the loan outstanding. Because of this compounding, an individual who begins drawing down their reverse mortgage line of credit can very quickly draw down or even exhaust their line of credit without realizing it. As such, in most situations, the payouts from reverse mortgages are skewed significantly in favor of the banks issuing them.
Ultimately, these are products sold to people with few other liquidity options and their pricing and structure reflects their captive market’s need. If you do require a reverse mortgage, proceed very carefully and absolutely try to find an experienced and independent planner or advisor to help you through the process.