A reverse mortgage is God's way of saying you need to sell your home.
I have written before about reverse mortgages. And again, and, again, and again, and again. Well, here's one more.
For the most part, they have an odious reputation, which is probably well-deserved. The reverse-mortgage industry has used a number of famous and trustworthy pitchmen to sell their services. Michael Douglas did a parody of one of these pitches in the Netflix series The Kominsky Method, which was almost a word-for-word rendition of the actual ad done by Tom Selleck (or is it Tom Sell-out?).
I get e-mails all the time from people wanting to do "guest posts" or wanting me to write about a topic in a manner favorable to their company. A lot of these requests relate to reverse mortgages.
Are reverse mortgages a ripoff? Before you delve into the pros and cons and crunch numbers (a path that could easily distract you from the overall picture) consider how these things are marketed. Again, having general principles in life is helpful in evaluating any transaction from 100 paces. And having such general guidelines in life can help you avoid a lot of pitfalls.
For example, when we started investing in real estate, we wrote down a dozen principles we had for investing. Number one was, "we will not buy any property we ourselves would not live in." - this prevented us from becoming slumlords and also from investing in bad neighborhoods. When someone would offer us a "bargain" property, we would look at it and then decide not to buy because frankly, the neighborhood scared us.
Does this mean we walked away from what could have been good deals? Yes. But there were better deals out there - less risky deals as well. And moreover, you don't have to invest in every goddamn thing that comes down the pike, just because it might be a good deal. It might not, too.
But one general principle I have as a consumer, is to be very, very skeptical and walk away from things that are marketed deceptively, loudly, and sound too-good-to-be-true. A telemarketer calls you, spoofing the phone number on caller ID to make you think you are getting a call from a neighbor or friend. The mere act of calling you is a violation of the Do-Not-Call act. Before you have even picked up the phone, these people have lied to you twice and broken the law. Do you think the free vacation they are offering is going to be a good deal? When you enter into any business transaction, predicated on a lie - even a trivial one - it can only go downhill from there.
Reverse mortgages are sold on the lie that you are "cashing out" the "equity" in your home, when in fact, you are actually borrowing money on onerous terms - under conditions which could result in you losing your house. And like most shitty financial deals, they target the poor and ill-informed, and as a result, a lot of poor people (which includes a disproportionate number of black folks) end up losing their homes.
So without even bothering to crank the numbers, do an analysis, research, and whatever, I can tell a reverse mortgage is a shitty deal by the lies and deceptions - no matter how trivial - used to sell them. The fact they want to SPAM my blog and trade on my goodwill tells me all I need to know. The deceptive ads with feel-good elderly white-male celebrities tell me the rest. Trust me - I come into your living room every week. Would I lie to you? Of course they would.
Recently, USA Today - the "McPaper" published two articles back-to-back about reverse mortgages. The first is a pretty balanced and informative piece describing what they are and how they work. Pretty value-neutral, although it spells out the pitfalls of foreclosure. If you are late on your tax payment, insurance payment, or even forget to return a postcard the mortgage company mails to you once a year to prove you are resident, foreclosure is imminent. They don't mess around with warning letters or grace periods. You forget, you are toast. And once foreclosure begins, late fees and fines accumulate, and it can be hard to claw your way back.
The second piece is more to the point - illustrating how poor people can lose their homes to reverse mortgages. People whose finances are thin to begin with, can end up losing it all to a reverse mortgage. Property taxes and homeowners insurance seem pretty cheap, when you pay them as part of your monthly mortgage payment - a few hundred a month, perhaps. But when you get that bill all at once - $2000 for insurance and maybe another $3000 for property taxes - you might find it difficult to pay, if you aren't very good with your finances. And "not very good with finances" often describes reverse-mortgage customers, which is why they end up with reverse mortgages in the first place.
It is interesting that USA Today published these articles. You see, the problem with the media is that they don't want to piss off advertisers. So they tend not to say outright that something is a raw deal. Oh, sure, they might put up an article that is "balanced" but it really more of a cheer-leading piece for reverse mortgages (or whatever else is being sold). The only thing I can think is that a reverse-mortgage company pulled their ads from USA Today, and this is their way of getting back at them - by finally publishing some unvarnished truths.
The big problem with a reverse mortgage is that it is a loan, and you are trading off a huge portion of your net worth for a pittance of money now, and paying interest for this privilege. Many folks hope they can get "something-for-nothing" and thus get an annuity from the mortgage company for life, and end up dying in their home and stiffing the reverse-mortgage company for the balance. But these mortgage companies are not fools - they have actuarial tables and calculators that can crank out compound interest. They know far more than you and I do, which makes this an asymmetrical transaction, in terms of power and knowledge.
The easiest way to cut through the fog of a reverse mortgage (or any mortgage) is to look at the overall effect on your net worth - not monthly payments or whatnot. If you own a home worth $500,000 and take out a reverse mortgage for $250,000, you have to pay back that amount, with interest. If you spend that $250,000, your net worth has dropped by that amount, plus the interest you have to pay to repay the loan.
And you will have to repay the loan. According to the FHA, most people who take out reverse mortgages don't "die in the home" and stiff the mortgage company. Rather, they leave before then, and the house has to be sold off to pay off the balance on the mortgage. And often this means the homeowner gave away a huge portion of their net worth to a bank.
Another one of my principles and mantras is The more complicated you can make any financial transaction, the easier it is to rip off the consumer. The most basic financial transaction is the bartering of goods for cash. Anything beyond that, is suspect. When a dealer offers to take a trade-in, finance your car, or lease it, they add layers of complexity to the deal, and pad a little money in the deal, for themselves, with each layer.
A reverse mortgage is a complex financial transaction, and as such, people have a hard time seeing how it can be disadvantageous to them. "I'm cashing out the equity in my home!" they crow, "look at this big check I got!" they say. They can't see the downside in the deal, because the deal is complicated, and like most raw deals today (7-year car loans, 20-year Boat and RV loans, lifetime student loans, payday loans, etc.) they are based on the concept of time-shifting money. I give you a pittance now, you owe me a pile later on.
Consider Cicily (not her real name) who had a reverse mortgage on her house here on the Island. She used the money to remodel the home, and lived there for many years. But eventually, it was too much to keep up the house and dementia set in, along with a broken hip. So off to "assisted living" she goes and the house is sold for about $380,000, the proceeds of which go to the bank. Cicily gets nothing out of the deal. She borrowed $200,000 initially for her remodeling. The remainder of the "equity" in the house went to interest payments and fees.
Now, some folks might argue that Cicily got what she wanted - a remodeled house and a chance to "stay in her home" for another few years. And I suppose there is merit to that argument. But it doesn't seem like an economical way to live, spending nearly $2 for every dollar in remodeling expenses. In fact, borrowing money to remodel or repair your home is probably a good sign you own too much home.
One of the victims profiled in the second USA Today article did just that. He needed money to repair his home and used a reverse mortgage to do this. When you can't afford to repair your home without encumbering it further with more mortgage, something is definitely wrong. To me, that is a sign you need to buy a smaller or cheaper home, or just rent.
Owning a home is just a series of repairs.
We are in the middle of a home renovation, and are paying cash as we go. We bought some engineered hardwood flooring at a discount wholesale outlet. They were happy to be rid of it, as it was in their warehouse for nearly a decade. We are repainting the interior of the house, one room at a time, and installing the flooring in the bedrooms, which were covered with the cheapest carpet imaginable when we bought it, 15 years ago. We also repainted the ceiling and trim, the latter of which was painted with a flat white and showed dirt badly. And yes, I put two coats of wax on the engineered hardwood, as that stuff has its limitations.
But that is what owning a home is - a series of repairs. Things wear out over time and have to be replaced. There is no such thing as an "unexpected repair bill" if you are an astute homeowner. Owning less house is one way to avoid this problem, and one thing I plan on doing when I get older.
One reader writes that downsizing makes no sense at all, as in some markets, buying a condo would cost as much as a house. I am not sure how to parse this, as yes, indeed, in almost any market, you can find a condo that costs more than your house, if you want to look hard enough. But there are also places to live that are cheaper - and moving to a cheaper place to live is one alternative.
Some older folks like to move closer to their children so they can "see the grands!" - women in particular seem to crave this second bite at the parenting apple. And in some markets, you'll pay a lot of money for even a small house or condo (or apartment) and property taxes can be high. But that is a conscious choice they made, and the value to them is being near their kids.
To me, it makes no sense. I would rather have less as I get older. I can sell this house and pocket $500,000, tax-free and live off that for a decade or more and move into the condo I already own (or buy another (hotel) condo here on the island, using a Starker deferred-exchange). The nice thing about the latter approach is that the hotel-condo rents out the place when I'm not there, so if I want to travel or explore, I need only lock the door and not only is everything taken care of while I'm gone, I make a little money renting out the place, with no intervention on my part. No lawns to mow, no repairs to make.
One reason we sold the vacation home on the lake in Central New York was that we found ourselves doing repairs and maintenance on the home, rather than enjoying the Finger Lakes and Erie Canal and the Adirondacks. We have seen more of that region since we sold the house, exploring by RV. When we owned a home there, it seemed the lawn always needed mowing, the roof needed repair, or something needed an overhaul or upgrade. And that was a pretty new house, too - not some falling-down shack. We learned that a house is just a thing, a possession, and possessions can be a form of slavery.
I would much rather sell the home I live in, and downsize to even a park-model trailer, and be able to live and enjoy life, than to trade half the equity in the most expensive thing I own, so I can "stay in the home" and watch it fall down around me. Remodeling is sort of fun, but it gets harder and harder as you get older. And hiring people to do repairs on your home is, well, expensive. And it gets more expensive every year. Older people are prime targets for contractor scams - every year, you hear the sob stories of an old couple who gave a pile of money to a sketchy contractor who guts their home and then walks off the job.
Given all that, why on earth would anyone want to own a home at age 70? Or worse, age 80? 90?
And yet, I see this, firsthand, here on retirement island - a front-row seat and first-rate education in how getting old works out. Old people rattling around in four-bedroom homes, unable to even garner the energy to clean them - or clean themselves. The luckier ones - the ones who still have money - can afford a "caregiver" at $18 an hour or more. The unluckier ones are found dead - after several days, when neighbors notice the flies and smell.
No, "staying in the home" has no appeal for me. And reverse mortgages make no sense, whatsoever.