As far as I am concerned, retirees have been the most innocent of victims of the financial crisis. During the past two and a half years the aggressive action of the Federal Reserve to lower short-term interest rates, while sound policy, has nonetheless created great hardship for retirees who rely on safe interest income to to live on. Yields on bank and credit union deposits, as well as short-term Treasury bills, are below 2 percent. It’s hard to make ends meet with that paltry payout.
So I completely understand when retirees come to me and ask what I think about taking out a reverse mortgage on their home. It sounds so enticing. You tap the equity you have in your home, owe no money to the bank as long as you stay in the home, and you can suddenly have $1,000, $2,000, or more income each month. It sure seems like such a great lifesaver.
But I ask every retiree — and the grown children of retirees who are looking out for the best interests of their parents — to be very carefuI. A reverse mortgage can end up sinking you financially.
The biggest risk with a reverse mortgage is that you do not stand in the truth of your situation. While a reverse mortgage can indeed be a viable way to generate income, it is very important to understand that after you take out a reverse mortgage you will still be responsible for paying the property tax, the insurance premium, and all the maintenance costs for your home. If you can’t continue to cover those costs you will risk losing your home to foreclosure. That’s exactly what many retirees who already have a reverse are facing today. (Just check out this note from the Federal Housing Administration, which insures the majority of reverse mortgages. The FHA is well aware it has a growing problem on its hands.) I don’t want you to end up in such a sad predicament.