The Reverse Mortgage Gamble

The current legal investment scheme to rob most of our senior citizens of the only financial equity they still have left:

Since moving to Florida, I’ve noticed many reverse mortgage ads on TV—they seem just too good to be true, and you know what they say about too good to be true. It usually is a scam. 

Here is the main thing the ads do not reveal: You must own the home free and clear! You cannot have an existing loans against your home.

Yes, they will tell you it is okay if you are still carrying a mortgage.

What they mean is this; they will give you the money to pay off your current home loan(s), and  using remaining equity factored with your age (you must be at least 62), plus the new current interest rate environment. Then, the lender will come up with a loan amount & monthly payment you can live with, a lump sum amount, or make you write  checks for the amounts you want without exceeding the agreed upon reverse mortgage loan.

 Remember there are several home valuations:

1. The Emotional Valuation. The ‘feel’ by the homeowner, which is always higher than the real value.

2. The Quick Sale Valuation: Realtor estimate that is always lower than the emotional valuation.

3. The Bank Valuation: Done by pro appraiser, not the best but more accurate than the other two (remember: before the housing bubble burst, if homeowners did not like the estimate, s/he would just get a new appraiser until the wanted value was quoted.

4. The Actual Sale Value: The price the buyer and seller agree upon and finalize.

Reverse Mortgage Example #1.

Home is worth $175,000 with no loans or obligations.

If you are over 62, the reverse mortgage company will use the equity in the home, your current age and interest rates to calculate the monthly payment you will receive or give you a lump sum. Their  preferred method is to give you a check book so you can start writing checks against the agreed upon equity in your home.

Reverse Mortgage Example #2.

Home value is $175,000, and you owe $75,000 to the bank. The reverse mortgage company gives you 75K to pay the bank. They then calculate the monthly payment to you (or lump sum) using the $100,000 remaining equity, your current age and the current interest rate.

Now you see why so many commercials are aggressively pushing reverse mortgages, especially in states with many retirees. Getting the elderly to reverse their homes when interest rates are near zero means that they will get a lot less money for their house. It is legal robbing wrapped in a slick sales pitch. The other way seniors get robbed is due to the 2008 housing bubble because home prices are still about 50% down on average that means there is less equity in elderly-owned homes.

The TV ads are true in that, once you have signed a reverse mortgage agreement; they cannot kick you out of your home. But, if you are 62 or older and took a lump sum amount of $100,000 and unwisely spent your money and if five years, you would still have a home but would have no cash. 

Here is what the ads do NOT verbally communicate or tell you in bold print:

o   If the homeowner cannot make real estate’s tax payment and /or the homeowner’s insurance, this may lead to foreclosure and now the homeowner will be homeless.

o   If the person becomes very sick and can no longer be in the house, then the reverse mortgage, plus all cost associated with it, is due and must be paid off – and if not, hello foreclosure!

o   If the homeowner fails to keep up the maintenance of the home, this can lead to foreclosure on the home.

o   If the homeowner now has a child, grandchild or even a new none-borrowing spouse and he/she is forced to leave, so must these other  “tenants” as deemed by the reverse mortgage agreement.

In addition to the above problems and quite a few more, if the homeowner dies and the house is now worth less than the reverse mortgage loan and fees, any beneficiary or living heirs will have to kiss goodbye to any inheritance.

Sherwin Brown

About Sherwin Brown

Sherwin has been an entrepreneur since he was twelve years old. He currently teaches, writes, and speaks to people about how to improve and safeguard all aspects of their financial portfolios.