Reverse Mortgages as a Debt Consolidation Tool
The baby boom generation is marching towards retirement with two distinct traits: 1) a vast wealth of home equity thanks to the boom in real estate that has slowed only recently and, 2) a heavier debt load than any prior generation of retirees. Together these factors seem a good match for taking on a reverse mortgage to consolidate debt.
Reverse mortgages are financial tools geared toward senior citizen homeowners that allow them to turn the equity in their homes into cash without having to worry about monthly loan payments. Instead, payoff of the loan and accrued interest are deferred until the homeowner dies, sells or moves out. Moreover, no matter how large the loan balance grows, the homeowner (or estate) never owes more than the market value of the home.
So, it seems like an ideal combination: seniors can consolidate and pay of their credit card debts with home equity and not have to worry about monthly payments.
But there is a downside. Reverse mortgages carry steep upfront closing costs for things like appraisals, mortgage insurance, and lender’s fees. The key to a successful reverse mortgage transaction is to have the loan outstanding for a long time (seven years or more) to amortize these costs. If the loan is paid off within a few years, the true cost (APR) of borrowing can be very high. However, a recent study published by HUD indicates that most reverse mortgage loans terminate within seven years.
Reverse mortgages can be useful tools for debt consolidation, but borrowers must be cautious and must educate themselves thoroughly about the pros and cons of reverse mortgages.