Boston Condos for Sale and Apartment Rentals

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Reverse mortgages – sometimes

The less equity you have, the more likely you will move.

Q: I guess it may be too late, but figured I’d ask. We did a reverse mortgage. We got almost no cash out of it, but it is eating up whatever equity remains with our loan that has an effective interest rate of almost 5 percent. Is there anything we can do? Thank you.

A: Reverse mortgages have been around for more than 20 years. The concept is enticing: If you’re over age 62 and you have equity in your home, there are a number of lenders who will give you a loan for a certain percentage of available equity (often up to 85 percent, but sometimes quite a bit less). The loan provides you with cash and no requirement to repay the loan until the home is sold or the owners pass away.

If you’re house rich and cash poor, and want to stay in your home but perhaps need funds to make repairs, pay off the mortgage to lower your cash burn or even augment your retirement income, a reverse mortgage can help. But it comes at a fairly steep price: a higher interest rate plus higher fees.

The higher fees eat away at the amount of cash you’ll get. The higher interest rate eats away at your remaining equity. And you still have the requirement to pay your real estate property taxes and homeowners insurance premiums.

It sounds like you needed cash, maybe didn’t qualify for a home equity line of credit and turned to a reverse mortgage as a way to secure the funds you required. The problem is the one you now face: You had a home without much in the way of equity, took what you could, and now have run through the cash and are out of options to get more.

It’s an unfortunate position to be in if returning to work is no longer an option or a possibility. When we get asked about reverse mortgages, we’ll often recommend that homeowners sell the property, take whatever equity they can and rent something that’s affordable. Or, better yet, move in with family or into some sort of shared living arrangement to cut costs.

Boston Condos for Sale and Apartment Rentals

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Reverse mortgages are legitimate financial products for many people – but one can see them spinning out of control for homeowners.

Think of all the potential fine-print pitfalls, not unlike subprime mortgages: interest rates, origination fees, insurance and tax requirements, service charges, upkeep provisions, foreclosure triggers, cross-selling of products. It’s a complicated financial arrangement, and, to be frank, one that could easily lead to abuses.

It’s good to see fed regulators are monitoring the situation. But the feds were also supposed to be monitoring who got on airlines and … never mind.

File under: Trust but verify, verify, verify.