Investor CAFÉ

The Truth about Reverse Mortgages

“A reverse mortgage has its benefits, but it’s an expensive way to borrow money and not without risks.” — John Schaub, author, “Building Wealth One House at a Time” (2nd edition)

Like you, I’ve seen a lot of ads promoted by prominent TV personalities, such as Henry Winkler (“Happy Days”), Tom Selleck (“Blue Bloods”) and Alex Trebek (“Jeopardy!”), encouraging you to get a “reverse mortgage.”

They make it sound appealing to seniors. Live in your primary home for the rest of your life without making a monthly mortgage payment ever again!

Essentially, a reverse mortgage is a special kind of home equity loan that replaces your traditional mortgage. The new loan pays off your first mortgage, and creates a new, bigger loan. Interest rates can be fixed or variable. You can take the money in a lump sum, a steady stream of monthly advances or a line of credit. The funds from the reverse mortgage are tax free — you don’t have to pay income taxes on borrowed funds. The key is that you don’t have to pay off the principal and interest like you normally do unless you sell the house or move out. In fact, the borrower (you) has no personal liability if the loan exceeds the value of the house at some point.

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