Reverse Mortgages: What’s the Catch?

Don’t Believe Everything Your TV Tells You

If you watch any of the major cable news channels – CNN, CNBC, FOX News – during the day, you’ll be inundated with advertisements for financial products aimed at senior citizens. Selling to seniors is a big business. And it will only get bigger in the years ahead.

Many of these ads are put out by AARP and its partners in the insurance industry. As we’ve documented in previous issues of Independent Living,
AARP-branded financial products are almost always pricier than competing alternatives you can find with the same or better coverage/features benefits.

Other daytime cable news commercials are run by “rare” coin hucksters who run bait-and-switch operations. They lure in people on the idea of owning gold or silver bullion, then up-sell them on overpriced numismatics. Some of the same rare coin outfits that have run expensive TV commercials (including Goldline and Merit Gold) have recently been hit with charges of fraud.

You’ve probably also seen commercials featuring celebrity pitches for reverse mortgages. These financial products are being marketed aggressively
to seniors because reverse mortgages are laden with up-front fees and ongoing costs.

One now airing features actor and former Senator Fred Thompson. What’s the catch with reverse mortgages? “There isn’t one,” Thompson says.

Of course there is.

Things to Consider Before Obtaining
a Reverse Mortgage

Here’s how reverse mortgages work: After you turn 62, you can work out an arrangement with a bank in which it will make regular payments to you based on the value of your home. The catch is that you pay up-front fees and gradually lose equity in your home. If your home is your biggest asset, a reverse mortgage can decimate the value of your estate.

There are ways to ensure that your family is taken care of after you’re gone, even as you enjoy the income that the reverse mortgage provides during your golden years. You can, for example, use a portion of the money you receive from your reverse mortgage to buy extra life insurance or set up trusts with designated beneficiaries.

An upside to reverse mortgages is that payments received from them are tax-free. So rather than cash out stocks and mutual funds and take a big tax hit, you could use a reverse mortgage for income and let your investments continue to appreciate.

Seniors (and non-seniors) looking to generate income from their homes have alternatives – especially if they have substantial home equity. For example, they can do a cash-out refinance, take out a home-equity loan, or tap a home-equity line of credit.

A reverse mortgage may well be right for you and your financial situation. But carefully consider your full range of options first.