Friday, June 19, 2009

Some Interesting Alternatives to a Reverse Mortgage

Finally some more articles warning about the equity loss involved with a reverse mortgage. We see this as basically taking a gamble against the future. Option ARM takers gambled that housing prices always went up and the accumulation of deferred interest would be less then the increase in the value of the home. Whether they were aware of the gamble or not is another story - but that was the big gamble with the Option ARMs. And we are almost on the verge of an epic wave of Option ARM foreclosures.

So the new product to gamble one's life savings is being pushed - the Reverse Mortgage. This article at (who is this - they seem to be everywhere?) titled A Reverse Mortgage Is A Costly Option To Use Your Home Equity sums up some of the problems and provides some alternatives. Let's take a look -

Unless your home is continually appreciating at a good clip, it won’t take long until there’s little of no equity left as a legacy when you die or move out. This is what makes reverse mortgages so costly to you and you’re loved ones.

If leaving a legacy is not an issue and you’ve the health to live on your own for 10 or more years, then a reverse mortgage may be a reasonable option for you. But if you want to leave a legacy, consider alternative ways to access the value of you home for income. Here are a few:

Renting a portion of you home: If your home has extra bedrooms you may want to rent a room out for the income it can bring you. You may even consider borrowing a little for creating an in-law apartment for renting. This allows you to remain in your house yet use it to create some income. You may find local programs that allow you to borrow cheaply for the renovation needed.

Sell Your Home to Your children: Your children can pay you a monthly payment toward ownership of your house. You could arrange that you’d have a right to live in it as long as you live. What better way to have your cake and eat it too - leaving all that equity to your children for the payments made to you.

Sell Your Home And Pay for an In-law at your child’s house: Here, you’ll have to move out of your home, but you get to live with your children, increase the value of their home, and have money from your home sale that you can live on -and leave as a legacy.

Sell and Buy-down: Again, you have to move out of your home, but if you buy down to a condo much better adapted to your age and needs, your extra equity from you home sale can perhaps supply sufficient income for you to live on. You may want to buy a life annuity with it too.

Because basically after all the fees involved with a reverse mortgage there may be nothing left after 10 years or so.

The selling point (from lender/broker) is the same with HELOCs during the bubble - it is your money and you are smart enough to use it wisely. Until we found that people were using HELOCs like ATMs - paying for vacations, eating out, the latest in entertainment and fashion, etc., etc.

How many people taking reverse mortgages will end up in the same bought as the HELOCers? Extracting all the equity early and left with nothing down the road...

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