September 5, 2017

Reverse mortgages can be predatory by targeting vulnerable and often ill-informed senior citizens.

Let’s assume your un-mortgaged home is worth $350,000 and you take out a reverse mortgage at age 65.   The mortgage can go to as much as 55% of the property value so $192,500.  Additionally you will have to pay, up-front, an appraisal fee, legal costs for independent legal advice (NEVER use a lawyer suggested by the mortgage broker/agent), legal fees on closing and insurance fees, so add another $5-10,000 to the $192,500 you are borrowing – you likely wouldn’t be borrowing the money in the first place if you had some savings.

Interest rates will be at least double the bank rates for a conventional mortgage and will effectively erode any equity you have in the property.  If you managed to live to the age of 80 years your house would have a mortgage of about $450,000 on it and if the value kept pace with inflation it would be worth about $442,000 after allowing for notional (selling) costs.  In simple terms the mortgagee would own the house.  Effectively you sold an asset with a future value of $442,000 for $198,000.

Now consider an alternative strategy:

A relative or friend buys your house from you then rents it back to you.  You take the money from the sale and invest it in the stock market generating the average annual return of 6% on your investment.  You can use the proceeds to pay the rent (mortgage).  As long as you are cautious with your investment withdrawals you may keep this up for the next fifteen years and still have some money to spend.  

The best part is after fifteen years your heirs (assuming it was family that purchased the property) have an inheritance in the form of equity in the property that you have paid for as well as some residual investment money.  Over the fifteen years, between age 65 and age 80, you will have paid about $105,000 in interest but earned about $170,000 from your investments, you will have been able to spend $1,000 a month on whatever you wanted and still have about $15,000 in the bank.