It's a bad product

Rebecca is a real estate agent from Indianapolis, IN, who just attended a class on reverse mortgages. She couldn't get straight answers from the teacher to some of her questions, so she called Dave to clear things up.

QUESTION: Rebecca is a real estate agent in Indianapolis, IN. She has some business experience, too, and recently attended a continuing education class on reverse mortgages. Rebecca asked the class leader several questions, and didn’t feel like she was given good answers. She also wonders why the product is being pushed on senior citizens. Dave sheds some light on reverse mortgages, and as you might guess, he’s not a fan.

ANSWER: Well, the reason they’re pushing it is that they make a ton of money. They’re much more profitable than a traditional mortgage. The biggest problem with it is that it’s full of fees. If you think closing costs in your world are bad, they’ve got everything in this baby. And, it’s set up to be a no-lose for the mortgage company. They’re going to end up with the property, or they’re going to end up with a ton of equity to protect them.

The reason they go after senior citizens is two-fold. One, that’s the market who have their homes paid for, and it needs to be a paid for—or almost paid for—home in order to work. They’re basically turning around and borrowing their equity back out. The other reason, the less scrupulous ones go after that market because they’re vulnerable. Scams on the elderly are not unusual. This is not a scam in the sense that it’s illegal or they’re doing something criminal, but in the mathematical sense it’s criminal. It’s just a horrid, horrid product.

A good rule of thumb, and you’ve tapped into this with your common sense and your business background, is that if the investment is on cable television as a commercial between walk-in bathtubs and self-insert catheters, it’s probably not a good product. You see a lot of bad stuff from the financial world advertised on cable television.

But the technicalities of why it doesn’t work are the fees are very high, the interest rates they’re calculated at are very high and the padding of the equity is extreme. In your world you can get an 80/20 loan, with no PMI, with a Fannie Mae loan. You’re not going to get anywhere close to those kinds of ratios on a reverse mortgage. It’s just a bad product, and it’s sold with the idea that you’ve worked hard all your life and you deserve to enjoy your money, so take the money out of your house. You know I hate debt, so that’s another reason. Why would you work your whole life to get out of debt only to go back in? That seems ludicrous to me.

 

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