Camped out behind the counter in Buzzy’s Country Store I hear a number of stories involving both good and bad luck. One of the bad luck stories that I have heard frequently thru the years has to do with folks who obtained a reverse mortgage. (Now that I think about it, I have never heard any good luck story about the advantages of getting a reverse mortgages.) It made me want to do some research on the subject.
First, a little history on how the program came to be. I learned that while federal oversight and involvement in reverse mortgages did not appear on the scene until a law endorsing it was passed in 1988, the program was actually started by a Maine banker in 1961 (click here.) The Maine banker devised a rather ingenious way for the widow of his high school football coach to stay in her house following her husband’s death.
The widow was “house rich – cash poor” meaning that she lived in a nice house that was paid off but still she didn’t have enough money to live on. Since she did not want to sell and move out of her house, the banker set up what we know today as a reverse mortgage. It is essentially a bank loan with one’s house put up as collateral. In that regard it is very similar to a second mortgage with one big difference – you do not have to make any monthly payments on the loan.
When you take out a traditional bank loan to buy a house, your “forward” mortgage is structured such that as you make payments and pay down on that loan you have a falling debt and a rising equity situation. With a reverse mortgage, it is the other way around in that the debt rises and the equity falls.
The program is often mistakenly simplified as the “bank buys your house” but that is not entirely correct. The homeowner continues to own the home, pay for it’s upkeep, property taxes and insurance on it. Too, the homeowner can always pay off the loan if he or she wanted to do so.
So why have I heard so many hard luck stories about reverse mortgages? Turns out I may have only been hearing from the unlucky folks. Several surveys show that an overwhelming majority (80-90%) of folks with a reverse mortgage express satisfaction with their decision to have obtained one (click here) and (here.)
As for those “unlucky” reverse mortgage folks, it is a case of any other money management endeavor – if you piss it away, it doesn’t come back. One fellow in Buzzy’s admitted as much to me quite frankly that as soon as he and his wife got their reverse mortgage “She went on a QVC spree and I bought a motorcycle. It wasn’t long before we were right back where we were before we got the mortgage and not able to make ends meet only now we’d signed away our house. It was our fault, and not the bank’s.”
After his wife died, this guy ended up selling the motorcycle and the house, paid off the reverse mortgage and relocated to Florida to move in with his daughter. Maybe you could say that he “reversed” his ways.
And since this has been about houses and homes, what better song to play than this:
