Reverse mortgages are an area of some controversy in the financial community because some people think they take advantage of the financial weakness of retirees and older people. One thing I have pointed out consistently in my blogs is that having a mortgage that is paid off takes considerable stress from your monthly living expenses. What a reverse mortgage does is basically take advantage of the value of your home to add another source of monthly income by taking out a loan using the house as collateral.
One way this is an advantage is when the home you are living in is not going to be passed along as an inheritance. For examples, single retirees or retirees without children may not have anyone in particular to give their home to upon their death. Using the value of the home to enjoy a higher standard of living will make their retirement years more enjoyable.
Another instance when a reverse mortgage is beneficial is when Social Security is the sole source of income for the retiree. There is no doubt that the second source of income will significantly benefit retirees, and is a solid alternative to either selling their home or living day-to-day because of their lack of retirement income.
But there are some negatives that go with the decision. The most obvious one is that the reverse mortgage may leave no inheritance, or a meager one, to the children or relatives. As I mentioned in an earlier blog, for some people the issue of family looms huge when making retirement income decisions. It should come as no surprise that children are some of the most ardent opponents to reverse mortgages.
A second downside to the choice is that the bank who will be parsing out the monthly income checks will charge a number of fees for the loan. This is no surprise to people who deal with banks, but the problem is in the math. As an example, if you have a home worth $50,000 and you go with a reverse mortgage, you may choose to take a monthly check for $2,000 over 25 years. That approach calculates to a loan period of 25 years. But when you add fees into the equation, that period could be shortened by 3 to 5 years.
Generally, the reverse mortgage is considered to be a last resort by responsible financial advisors and planners. That is something I agree with.