So the Baby Boomers are quickly turning into the Silver Foxes. They have worked hard to pay down their mortgage and are on the brink of retirement. More leisure time which means more time to watch HGTV. Throw in a few ads from Sandals Resorts and the conversations quickly turn into “Wouldn’t it be nice to A) Renovate the house, B) Travel the world”
Not so fast. There is a problem. Many of these Foxes are house rich and cash poor. How do they free up some money to do this?
Then, while watching HGTV, come the ads for the Reverse Mortgage and Voila! You have a very slippery slope.
Let’s have a look at Reverse Mortgages and all that is wrong with this idea. Here’s the low-down in super simple terms:
The lender advances either a lump sum or smaller regular payments which are borrowed against the Silver Fox’s home. The interest rates are higher than regular mortgages or lines of credit. As a result, the interest compounds and the mortgage can increase exponentially. For example, if you were to borrow $150K at 5.9% after 10 years, you would owe $268, 298K (assuming semi-annual compounding). Simply put, it is negative amortization. You see how quickly this adds up? You can deplete your equity far faster than you built it. (I am getting hives just thinking about it).
The good news? The mortgage only comes due when you die or sell your house. It is considered a “Life Term Loan”. In fact, depending on the market, there may not be anything left by the time you die. (Lazy kid thinks he stands to inherit a bundle? The jokes on him.)
There are upfront costs too. The lender will require an appraisal. They also advise independent legal counsel and of course, administrative fees. And yes, the homeowner pays for this.
Should you get caught in this web and decide to get out before the term is over? That costs money too. In some cases, the penalty is as steep as 11 months interest but could be as low as only four . (That’s low?)
But wait. It gets worse. When you die ( and you will because these reverse mortgages are sure to kill you) The estate has a 30 day period to tidy up your affairs, market the house, sell, and close it. Thirty days folks. You better hope grandma doesn’t hoard. After the 30 days, the clock starts ticking and the lender is looking for their payout. There becomes a penalty every month that you are dead and the lender has to wait for their money. (My hives just returned). If the will goes into probate, you are not able to sell right away. In fact, it can take north of 6 months for probate to clear. During this time, the estate is paying taxes, and utilities in addition to the lender’s penalty.
At this point, maybe it would be good if Grandma hoarded because you are going to need to sell stuff on Kijiji just to pay the probate lawyer.
Perhaps you take an RM and eventually feel it is time to simply “downsize”. Nice idea but you may not have enough equity left in your home to do this, particularly if the price of housing falls even a little. Ouch!
The RM may not even be an option depending on your age (The minimum age is 60) If you already have outstanding debt, this too will be taken into consideration when applying.
So what do you do if you are a Silver Haired Fox with a great house, a desire to free up some money AND you want to live well? Stay tuned because there are answers. In my next week’s blog, I will introduce you to a great answer. It is so easy you will wonder why you hadn’t thought of it yourself.
Stay Tuned my friends ……