Reverse Mortgages

In theory, a reverse mortgage can help under-saved retirees, but trends show that it is being used in ways that may harm these retirees in the long run.  A reverse mortgage allows retirees to take out a loan against the equity in their home and potentially turn the proceeds into a monthly income stream.  While the home used to be a safety net in this respect, now homeowners are exhausting much of their home equity with this tool. Last year, 73% of reverse mortgages were taken as a lump sum to pay other debts, as opposed to taken in periodic portions to create a monthly income stream.  

Many homeowners misunderstand the reverse mortgage and do not see that they need to stay current on upkeep, taxes, and insurance.  By taking reverse mortgages as a lump sum to pay other debts, homeowners are losing their safety nets and have no money in the bank and no income stream to show for it.  

Since reverse mortgages have become so popular, retirees do not consider other funding options that may be better for their incomes, including annuitizing assets, selling the house and downsizing, or cash-out refinancing.  

See Dan Kadelec, Selling Your Dream for Cash: The Unfortunate Mainstreaming of the Reverse Mortgage, Time.com, July 3, 2012. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.