As with most things in life, people seem to take radical sides when it comes to Reverse Mortgages.  Some advocate that Reverse Mortgages are the saving grace for seniors, while others want to focus on the costs involved in a Reverse Mortgage and say these HECM Loans are praying on the elderly.   All in all, it’s a tough argument, but the reality is that it goes back to the familiar saying of “pay me now or pay me later.
 

The first thing we all need to comprehend is that mortgages aren’t free.  They are products designed to make money.  The money they make is dependent upon the risk to the bank.  Ask yourself the simple question about your own funds: If you had $200,000 to lend someone and you had no idea of who they were personally.  The only thing you had to go off of is their application and credit report.  And let’s say the first person told you, “I want to borrow $200,000 and I will repay you over 30 years at 5%.   Sounds pretty good.  You would get a constant return for the next 30 years and make over $186,000.  You would almost double you money.  The next individual asked to borrow the money but told you, “I want to borrow $200,000 but I only need it for three years.   You have to consider that the return may not by as high as a 30 year term, but you will also have your money back in three years to do something else with.  And you will still receive $30,000 in profit.  You would make over 10% profit in three years.   The next individual comes in and says, “I want you to give me $1,200 a month for the rest of my life, and I will pay you back when I leave my home or pass away.  (Ah yes, the Reverse Mortgage).  Hmm, this stops and makes you think:  What’s the value of home now, how old is the borrower, what are the odds of making money by lending it?  If I give them  $1,200 a month for 15 years I would actually loose money.  (13.9 is pretty close to the break even point in this scenario).   Your response will most likely be one of “OK, I can only do this if I get some kind of profit up front.  So I will take $20,000 up front, and I will gamble on the rest.  In the back of your mind you are playing the odds of – will this person live that long?  Will they be forced out of the home and into a nursing home? Or will some other disaster take place.  From a risk standpoint you are in pretty good shape.  You have your profit up front with a solid asset backing it; an asset so strong that it’s to your advantage if things go sour.  You may be able to take less profit because you can reinvest yourself.

Now, what gets me at times are all the folks who say Reverse Mortgages are too expensive, or are taking advantage of the elderly.  I feel taken advantage of when I read how much money I will pay out to the bank by the time I pay my mortgage off.  Its never like when I asked my brother to borrower $700 and I paid him back $700.  Yes the truth is that banks lend money to make money.  So pay the bank now or pay them later.  The reality is that giving the money up front, reduces the risk to the bank, thus the terms may be better off in the long run.

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