The pitch for reverse mortgages goes like this: “Need a little extra cash for daily expenses, travel, and prescriptions? Use the equity in your home. Call today to see how much cash you qualify for!”
A reverse mortgage is when a company pays the homeowner, who typically has a paid for home, a cash payment each month in exchange for increasing ownership in the home. The amount of the payment and the number of payments depends upon how much of the equity the company is willing to buy from the homeowner. When the homeowner dies or wants to move, the home would be sold with the reverse mortgage company receiving whatever equity they have purchased plus fees and interest.
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The trouble with reverse mortgages is that the fees are outrageous. It is odd that what would seem like a very safe investment, because the homeowner has large amounts of equity so the lender is well shielded against default, would charge such high fees. The only reason I can see for the high fees is that the lenders are taking advantage of old people.
The best solution for having cash and income when one is retired is to save all of one’s life, building up assets, and then have stock and bond investments from which one receives an income. For those in their twenties to forties reading this, take this to heart before going out and buying a bunch of depreciating toys. If one has failed to do this and is in retirement, at least do not give up the amount you have saved in your home to a lender with outrageous fees.
Instead of taking out a reverse mortgage, there are many other ways of using one’s home to gain income. One way is to simply sell a large home and pay cash for a smaller home or rent a townhouse or condo, putting the rest of the money in a CD or investment account. Another method is to rent out a room in the house to a tenant. Another possibility si to rent the whole house for periods of the year, for example if one has a summer home, the house could be rented out for the months of the year during which the home is unoccupied. An ideal situation would be if one lived in a college town in a cold climate is to rent the place to a visiting professor during the school year while one is in warmer climates.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing