A client of mine shared this story with me. I share it with you.
Shocking sticker price of a reverse mortgage
I recently have been helping an elderly gentleman sell his condo and although he had said that his reverse mortgage was awful, I was not prepared for the tremendous bite a reverse mortgage takes. In the 12 2/3 years that he had the mortgage the debt rose by 4 times! Plus, in the small print, it was stipulated that he had to pay an additional amount that turned out to be 84% of the original loan.
So, say his original loan was for $10,000, he paid back:
- 4 times original $40,000
- Additional amount $ 8,400
- TOTAL owed $48,400
This total debt is close to 5 times the original amount borrowed in just 12 2/3 years
Rather than allowing him to feel secure as he aged, he worried about and was alarmed by the rapidity of his growing debt. The company that held his reverse mortgage was also mindful of his large debt and did monitor the value of his condo closely. There were certain conditions that he had to fulfill each year which he found a nuisance like proving insurance coverage and payment of property taxes. If he voluntarily moved as opposed to being moved for health reasons, he would be liable for any debt that was not
covered by the sale of his home for his lifetime.
Coincidentally, on Oct.13, 2005, Chris Olsen, of Olsen on your Side, interviewed a family that was also alarmed by the growing debt of their mother who had taken out a $30,000 CHIP reverse mortgage to make some repairs to her house. Through the wonders of compound interest in just 3 ½ years that debt had grown to $48,000!
If any one is considering the options for obtaining larger incomes, I hope that they consider some of these other options first:
- Take out a conventional mortgage and have the heirs of your estate take over the payments
- Or have the heirs pay monthly support
- Sell and live off the proceeds of investments
- Rent part of it
- Borrow money as needed on a line of credit
If a reverse mortgage does at first glance seem attractive have an independent accountant show approximately how your debt will grow over a 10 year period. Always read the fine print and understand it fully. The elderly gentleman I had helped was very generous with his donations and I am sure would much rather of had the profits from the sale of his condo go to causes that he believed in than to a mortgage Company. So don’t be fooled by those commercials, if you hated having a mortgage when you were young you will feel the growing burden of a reverse mortgage even harder to bear.