Reverse Mortage

A reverse mortgage sounds tempting, "tax free cash". A reverse mortgage is not "free", it is a loan that has to be paid back when you die or move out of the house.

The product was created as a way to tap into your home equity to pay bills without requiring you to lose your home. It may be a great solution if you have exhausted all other assets to pay something like a big healthcare bill. But it's a very very expensive way to obtain cash. There are high up-front fees and limits on how much you can get. The lender basically sets up an account of all the money they pay to you and add interest and fees to that amount, all of which increases even more because it's compounding. You don't have to pay the loan back as long as you are in the house, but once you leave, or if you get behind on related expenses like real estate taxes or insurance, the lender can foreclose.

There are lots of ways this could turn out badly. A surviving spouse might be forced to either pay off the loan or move out. The children who hoped to inherit the home won't be able to without paying off the loan first. And if you have to leave the home for 12 months or more because of health conditions, the loan will be due.

So it pays to be cautious!

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