A seemingly rational sounding excuse to get a reverse mortgage is to maintain your standard of living; to stem negative cash flow. Since costs for the elderly often rise faster than retirement income sources, budgetary shortfalls are becoming increasingly common.
In this situation, reverse mortgages are not a solution. They make things worse!
First, even though you receive cash, the fees and interest charged through reverse mortgages accelerate your financial deterioration. If you cannot afford your current cost of living, adding many thousands of dollars, perhaps hundreds of thousands cumulatively, in bank expense is not going to help.
Second, costs will probably keep going up faster than income. While a reverse mortgage might plug a gap in current cash flow, time and normal economic trends will create another gap at some point in the future. By delaying a proper budgetary move that would correct your current hole, a reverse mortgage would force you into a financial chasm.
For example, assume your monthly income is $4,500 but your monthly expenses are running at $5,000 and growing by 2% annually. To close the gap you consider tapping cash flow from a tenure reverse mortgage which can provide monthly payments for life. To help make the analysis more concrete, assume 5% interest on the mortgage, a $300,000 home value, and an initial saving account balance of $70,000 earning 2%.
Using H.U.D. (the U.S. Department of Housing and Urban Development) guidelines and industry norms you could get monthly payments of $912, which would fill the gap between income and expenses with over $400 to spare at first. But time will pass and costs will rise. At only 2%, presently the Federal Reserve’s inflation target, it will take less than 6 years for expenses to once again surpass cash flow, inclusive of the reverse mortgage payments. You could then sell your home and get your expenses in line, but after paying off the reverse mortgage you will have about $92,000 less to work with.
If you were prudent and saved all the extra cash flow during those first 6 years of reverse mortgage payments you would run out of money about 10 years later. At this point, you would owe more than $300,000 to the bank; more than the home value. You would have nothing in the bank, and you would get nothing upon the sale of your home; all due to the reverse mortgage.
Your better route is to address your budget. Obviously, first seek ways to either reduce expenses or increase income by the needed $500.
If you have no avenue to close the gap, want to stay in your home, and can coordinate affairs with family who stand to inherit your home, develop a simple plan to close the budget gap. For instance a co-signed home equity line of credit would be far less costly than a reverse mortgage. Simple cash infusions as needed would work even better. An entire home and legacy is worth a family discussion.
If you cannot close the gap and have no good source for funds, accept the fact that you should move. You cannot afford your current lifestyle. Adding the expense of a reverse mortgage will only make things worse. You can get the full value of your home now and buy or rent an affordable place.
Using the example above, at the time you should consider moving you would have $370,000 in assets to work with. If instead you obtain cash through a reverse mortgage, your home equity – all $300,000 in the example – will disappear. When your cash flow again goes negative, you will be forced to move with vastly less to work with. If you wait too long, you might find yourself literally impoverished – with no home equity and nothing in the bank – all due to the false promises of the reverse mortgage.
Get the whole picture. Read The Final Rip-Off: Reverse Mortgages available at Amazon and Barnes & Noble.