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30 Oct 2014
Reverse mortgages are advertised every day on many cable and satellite channels, and the companies promoting reverse mortgages are using some of the most credible actors to help them sell these loans. Who doesn’t love T.V. personalities like Fred Thompson, Pat Boone, Robert Wagner, Alex Trebek, and Henry Winkler? Reverse mortgages are packaged as the salvation of the elderly, and selling these mortgages has been a cash cow for the mortgage companies. Are reverse mortgages a blessing or curse for homeowners? Are they the panacea like the commercials would like us to believe, or is there a downside or danger for retirees?
Reverse mortgages are sold purely on a simplistic financial benefit to older homeowners (62 and older). The benefit of getting a big check that you don’t have to pay back while you are alive is simply too tempting for many retirees, especially those who are on a very tight financial budget or have such a limited retirement that they can’t meet all their needs. For those who don’t have enough to live, a reverse mortgage may be their salvation. But there are some very serious downsides to reverse mortgages. Many retirees have lost their homes as a result, and there are numerous Internet articles which you can find by searching Google. What I want to touch on here is the less obvious and what is not being talked about, which are the long term financial implications and philosophical issues involved.
In the past seven years the vast wealth of the middle class in America took a huge hit by the economic recession and by the devastating real estate crisis, which itself has taken away most of middle class Americans’ home equity. The losses for the middle class are not in the billions, but trillions of dollars. People have had to rob their retirement IRAs and 401(k) plans just to survive. Not only has vast sums of equity in real estate disappeared, retirement accounts have been depleted. According to the Employee Benefit Research Institute more than half of American workers say they and their spouses have less than $25,000 in savings and investments. As a result, here has been a slow but dramatic change in Americans’ approach to financial planning and retirement, and the idea of passing wealth on to children has almost disappeared. We even have bumper stickers that express this philosophy:
Previous generations had a philosophy of life that included concepts like hard work and independence, long term planning on building equity in real estate, delayed gratification, living debt free, and passing on wealth to the next generation. Today America has largely thrown all of those philosophies over the bridge and traded them for the popular entitlement mentality, immediate gratification, living on debt, and spending it all before death. This is a dangerous trend, and unfortunately reverse mortgages fit nicely into this dangerous philosophy. Granted, for the couple who absolutely have no way to live and need to pull their money out of their home, then maybe nothing else matters except the money. But for those who want to do everything they can to live with traditional values, like financial freedom and living debt free and passing on something to their children, reverse mortgages are not consistent with that way of life.
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