Retirement: Get Your Finances Ready

Staying Put: The Pros & Cons of Reverse Mortgages
Monday, June 23, 2008

SUZANNE PRATT:

Many new or soon to be retirees want to stay in their homes. But they worry they won't have enough money to do so or wonder what will happen if they face a financial crisis. For some a reverse mortgage can be a viable option. But it's not for everyone. Tonight, as we continue our series "Get Your Finances Ready for Retirement," Connie Hicks looks at the pros and cons of reverse mortgages.

CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT:

If you love your family home, perhaps the last thing you want to do when you retire is to sell it and move away. But staying put on a fixed income may not be easy. And if it's a problem, Robin Talbert of the AARP Foundation says a reverse mortgage is often seen as a solution.

ROBIN TALBERT, EXEC. DIR., AARP FOUNDATION:

Typically people take out a reverse mortgage because they need the additional income to stay in their home; they may be what we call house rich but cash poor.

HICKS:

A reverse mortgage is a loan taken against the equity you -- the retired homeowner -- have in the home. The bank provides you with cash, either monthly or in a lump sum or as a line of credit that you can draw on as needed. However, you never have to make a mortgage payment. That's because the loan is usually paid back from the proceeds of the home sale after you die or move away.

Two years ago, Diana and Peter Nicholson decided to get a reverse mortgage on their Washington, DC condo. They didn't need the money immediately, but they wanted a safety net. So they got a $260,000 line of credit.

DIANA NICHOLSON, RETIREE:

It provides us with money in case we have an accident or a crisis. We don't have to go into our savings.

HICKS:

Financial planner Terry Savage thought a reverse mortgage was such a great idea, she helped her father get one.

TERRY SAVAGE, AUTHOR/FINANCE COLUMNIST:

A reverse mortgage gives you a tax free check a month or a lump sum. It's your own equity that you're taking out and you can use it while you're there.

HICKS:

But other financial planners, like Jonathan Pond, say reverse mortgages should only be used only as a last resort.

JONATHAN POND, AUTHOR, "YOU CAN DO IT!:

I refer to them as a late in life trump card. When you have the house, you're desperate to stay in it, but you're running short of money, then a reverse mortgage makes sense.

HICKS:

The experts we spoke to said reverse mortgages are not for everyone because they tend to carry high fees and interest rates.

An AARP study found that on a $300,000 home, fees and charges on a typical reverse mortgage average almost $30,000 not counting interest. [As a lender of revese mortgage for 4 years, I have never, never seen a revese mortgage fee of anywhere close to $30,000...this from actual, real experience, which AARP doesn't have. G.Boone]

And those costs are magnified for those who take a reverse mortgage while still in their 60's. Sometimes retirees are told to take out a reverse mortgage in order to purchase an annuity. But even people like Peter Bell, who represents sellers of reverse mortgages, says that's probably not a good idea.

PETER BELL, PRES., NATIONAL REVERSE MORTGAGE LENDERS ASSOC.:

Any prospective borrower who's talking to a salesperson who suggests that they get a reverse mortgage in order to purchase an investment product like an annuity, should really seek additional advice and not proceed just based on that sales person's advice.

HICKS:

Because reverse mortgages can be complicated, independent web sites like AARP's offer calculators and guidance. And the Nicholson's agree comparison shopping is essential.

NICHOLSON:

My advice is to find out as much as possible about them and to shop around as much as possible. And then if one feels that this is a good thing, then they should take a reverse mortgage.

HICKS:

Just remember, while a reverse mortgage is one way to stay put in retirement, its up front and back-end costs need to be carefully considered, especially if you're concerned about leaving money for your heirs.
Connie Hicks,
NIGHTLY BUSINESS REPORT,
Miami Shores, Florida.

PRATT:

The web is a big part of our effort to help you get ready for retirement. On our web site NIGHTLY BUSINESS REPORT at pbs.org, you'll find an array of resources, information and tools you can use, including podcasts of our stories. So check out the "Get Your Finances Ready for Retirement" section of NIGHTLY BUSINESS REPORT at pbs.org.