Dear Liz: I have been a reverse mortgage specialist for the last 12 years and had some thoughts about the writer who complained that the $40,000 she initially borrowed had grown to a debt of $189,000, or more than her home was worth.
Using a compound interest calculator, it would take about 16.5 years for the debt to grow that large. The borrower would have lived in their home for all that time without making payments toward the debt, although they were still responsible for taxes, insurance and maintaining the property. They can stay in the home for as long as it’s their principal residence. Once they leave the home, the lender will sell the home and receive the difference between the sales price and the loan balance from the government insurance program that everyone with a reverse mortgage pays into. Otherwise, no lender would take out this loan for a potentially long term and risk losing money in the end. Maybe it was a good deal.
Answer: Possibly, but she regretted the decision anyway. She took out a reverse mortgage at a time of financial hardship and now wishes she hadn’t.
People facing financial crises often develop tunnel vision and grab at solutions without thinking through the future costs of their decisions. (The excellent book “Scarcity: Why Having Too Little Means So Much” by Sendhil Mullainathan and Eldar Shafir explains the science of why that happens.)
Advertising for these loans can gloss over the downsides, such as potentially not being able to tap your equity later, when you may need it more. Reverse mortgages can be a good solution for some seniors but certainly not all of them.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.