The most absurd detail in reverse mortgages is that they only get repaid when you die or move out. They're literally structured around betting you'll croak soon enough that the bank makes money.
This is an actual financial product. The marketing says you can "tap your home equity without a monthly payment." The fine print says the bank gets your house when you're done living in it. Which happens when you die. Or go to a nursing home. Which happens right before you die.
People call these mortgages "risky" like the risk is some technical lending consideration. The risk is you live too long. You become the problem. Your continued existence is the obstacle to closing out the loan profitably.
The bank has done the actuarial tables. They know when you're supposed to die. They've priced it in. If you exceed your expected lifespan, you're essentially stealing from them by staying alive in your own home.
This is different from a regular mortgage where the risk is you stop paying. Here the risk is you keep breathing.
The product exists because boomers own houses but have no savings. They need cash. The house has equity. The obvious solution is to sell the house and move somewhere cheaper. But that would require admitting they can't afford to live where they live.
So instead they take the reverse mortgage. They get monthly checks. They stay in the house. The interest compounds. The loan balance grows. And the bank waits.
The entire business model is patience.
Is a reverse mortgage right for you? Ask yourself one question: are you definitely going to die in this house soon enough that your heirs won't inherit negative equity? If you can't answer that with confidence, congratulations on your fundamental misunderstanding of mortality-indexed lending products.
Photo by Precondo CA on Unsplash
Leave a Comment