Monday, October 18, 2010

"Wouldn't It Be Nice!"

"Wouldn't it be nice!", a jingle I've heard again and again, promoting CHIP Home Income Plan reverse mortgages for seniors.  The ads tout the benefits: "Unlock the value in your home"; "Maintain ownership and control"; "Pay off your debts ".  The reality is that CHIP reverse mortgages are schemes for taking away the homes of seniors.

The prime feature is that you receive funds in a lump sum, and "no payments required for as long as you live in your home".  Yes and no.  If  "no payments required" means that you don't have to write cheques, then it's correct. However, the amount of the interest due is added each month to the lien on your property, and your equity is continuously reduced.  This is the "silent" payment.

Another advertised claim is that having this mortgage may make you debt-free.  This is true only if you don't consider the growing amount of your new mortgage a debt.

It may be true that you never have to make a payment for as long as you live in your home, but what guarantees that you will never need to move?  When you do, the amount of the reverse mortgage will be taken from the proceeds of the sale, possibly making it impossible for you to purchase another home.  You are then converted from a homeowner to a renter, a serious problem is you are retired and your only source of income is government pensions.

A far better choice for seniors who need cash is a secured home equity line of credit.  The interest rate is probably 2% less than the reverse mortgage (currently about 4% compared to 6%).  While the reverse mortgage has about $2,000 of upfront costs (closing costs, property appraisal, and independent legal advice), the line of credit may be provided free (or at a fraction of the cost of the reverse mortgage).  There is a payment due every month, but this can be covered by a comparable withdrawal, if necessary (less than the amount accruing on the CHIP mortgage).  The provider of the line of credit might withdraw it, but unlikely if  payments are made regularly.  Importantly,  the amounts withdrawn are only the amounts needed and the balance may be reduced at any time, without penalty.

The bottom line is that the home equity line of credit will cost you considerably less than the reverse mortgage and, if properly managed, preserve the equity in your home should you ever decide to move.

No comments:

Post a Comment