A disturbing trend is occurring today in the area of reverse mortgages. These instruments originated with what some might consider predatory lenders, but have gradually moved over to the mainstream lenders. Credible companies like Wells Fargo are now moving into this area.
As a Professor of Personal Finance at Eastern Michigan University, I have spent the last 16 years of my professional career helping young people make wise decisions regarding their finances. From credit card scams to payday lenders, the road of Personal Finance is filled with potholes and speedbumps. Reverse mortgages are just one more of those speed bumps..
First let us look at how a reverse mortgage works. Essentially, a borrower who has a considerable amount of equity in his or her home contacts a lender who offers such a loan. The lender will then make an estimate of how much equity the borrower has in the home and will offer a reverse mortgage loan for a percentage of that equity. Then, instead of issuing the borrower a lump sum payment, as is the case with a traditional home equity loan, the lender will pay the borrower in incremental monthly payments. So what's wrong with this picture?
Here's the problem. Depending upon the amount of equity the borrower has in the property, it is highly likely that the lender will eventually end up owning it. For example, with a monthly payment of $ 750 per month a significant amount of equity is going to be consumed in five or ten years. Another problem is that reverse mortgages are not interest free loans, so the rate of interest the lender charges is going to accelerate consumption of the equity. Unfortunately, the currently stagnant real estate market has made these instruments even more popular. It's a really great deal for the lender, since the borrower is a much better credit
risk than first time buyers who have been the primary victims of the recently soaring default rate.
Who is likely to be most negatively affected by the reverse mortgage; decent hard working people who have spent most of their lives working hard and paying their bills with the ultimate hope of owning a lien free property before they die. The reverse mortgage will insure that does not happen. If you want to die broke, get a reverse mortgage and get one fast!
