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Guarding Your Wealth for Senior Citizens
Should Senior Citizens Use Reverse Mortgages? Columnist Has An Answer
Every month you go further and further into debt and
have less wealth
By Jeffrey D. Voudrie, CFP
 Feb. 22, 2008 - Some of the most popular products
being pitched to seniors today are reverse mortgages. Everywhere you
turn there are free seminars, free reports and free DVDs, all touting
the amazing benefits these loans offer. Are reverse mortgages the
answer to seniors’ prayers, or are they too good to be true?
It all sounds so wonderful: easy access to your
home’s equity, no monthly payments, and all without having to sell your
house or move. You can have a guaranteed income for the rest of your
life! I feel that the sales pitches for these products do a disservice
to seniors and, in some cases, can do irreparable damage.
All of us are familiar with a traditional
mortgage. You borrow money from the bank using the home for
collateral. You are then charged interest on that loan and have to make
monthly payments. The larger your mortgage is compared to the value of
your home, the less equity (or wealth) has been accumulated.
A reverse mortgage is just like it sounds. You are
still borrowing money from the bank and using your home as collateral.
The only difference is that you don’t have to make monthly payments on
what you borrowed. Instead, the interest just builds up. So every
month you go further and further into debt and have less wealth.
You don’t have to pay off the loan unless you sell
the home or no longer live there. Another advantage of a reverse
mortgage is that you don’t have to have any income to qualify and there
are no restrictions on how you use your proceeds.
While these mortgages can be helpful to seniors
truly struggling to cover the basics, many seniors see reverse mortgages
as ‘free money’ that can allow them boost their standard of living.
Some providers are promoting reverse mortgages as an easy way to pay for
that dream vacation or expensive new car. For those with considerable
home equity, such possibilities are indeed tempting.
A reverse mortgage is probably the most expensive
loan available today. The up-front fees can be astronomical. Here’s a
real life example. A friend of mine asked me to check out a reverse
mortgage being pitched to his elderly parents. The proposal given to
them by the bank showed that in order to access $33,000 in equity, they
would be charged almost $18,000 in fees! That’s over 50%.
His parents had a home worth $230,000 and a
$100,000 mortgage. They needed $33,000 and didn’t qualify for any other
loan. A reverse mortgage has to be the primary loan on the home so
enough had to be borrowed to pay off the existing mortgage. So they
were paying fees on a loan of $133,000 instead of just the $33,000 they
needed.
The lender has to know that they will be able to
sell the house for more than you owe on it. That’s why they will only
lend around 65% of the home’s value depending on your age. In some
situations, if the home value doesn’t appreciate significantly over the
years, you could see your equity dwindle away to nothing. You have the
miracle of compounded interest working against you month after month.
His parents weren’t concerned about the fees
because they didn’t see it as costing them anything. But it does. That
money took decades of making monthly payments to accumulate. It looks
just like some numbers on paper, but it can have a very real impact on
their future.
The money spent in fees is money that they won’t be
able to spend on food, medicine or personal care. It’s money they won’t
be able to use to fix the roof or get a new water heater. And if they
don’t maintain the home, the lender can step in and take it away.
For those who receive a set monthly payment from
their reverse mortgage, it’s true that they won’t ‘run out’ of money.
That doesn’t mean there isn’t any risk. The monthly payment doesn’t
increase from year to year, but the price of everything else does. What
will you do if that set payment is no longer enough to meet your
expenses, and you’ve lost much of your home’s equity to high fees and
interest costs?
A reverse mortgage may be right in special
situations, but it’s anything but free money.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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