Reverse Mortgages a Reversal in Logic?

Letter to Romans: Commercials hailing Old Timers signed up for a reverse mortgage may help some “pay the bills” while drinking a martini for the rest of their lives, BUT regardless of the possible benefits mentioned it’s important to know about its “accrued interest” cost.

This is not to critique this investment tool, which is regulated by state & federal agencies and can help some elderly living on just Social Security but with a lot of home equity. The various offerings basically come down to a homeowner getting funds to pay off past or future bills secured by their home’s equity. Rather than paying back the loan with monthly payments as with a conventional mortgage, the fixed or variable interest rate charged (maybe between 6-9%) is accrued or deducted each month from the home’s equity. Watch the commercials to get all of the “pro” side to this investment “tool.” And get a good lawyer to explain the cons, especially the part about how expensive these “loans” can be & are in no sense “free money.” Most importantly, ask about the small print’s “interest accrual” feature.

That ”catch” few realize is this: In return for the right to make no payments to draw down the mortgage, the interest on a reverse mortgage compounds monthly against the loan balance that keeps growing and growing, especially if it includes a variable rate clause. Not only is the stated interest added to the balance each month but future interest is charged on the prior interest. CHAT GPT offers this example of the double whammy: “Suppose someone borrows 200K at 7% … and assume no payments are made: After 10 yrs, the balance could grow to roughly $393K; after 15 yrs, about $552K; & after 20 yrs, roughly $775K.” One saving grace is that federally insured HECM reverse mortgages are generally “non recourse” so neither the borrower nor heirs will ever owe more than the home’s eventual value, even if the balance doubles it or worse. Now that you know the math, anyone care for another martini?

Davd Soul