On Reverse Mortgages and Home Projects That Just Don’t Pay Off

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As far as anyone can foresee, it’ll continue to be a bad market for home sellers for some time to come, leading many homeowners to consider reverse mortgages or remodeling projects rather than selling at a lowball price. But both have their share of pitfalls.

The LA Times sums up the problems and misconceptions involved in reverse mortgages, in which a bank or credit union slowly buys a home from the owners:

When properly understood by seniors and underwritten responsibly by lenders, reverse mortgages can provide money to supplement retirement income, pay for uninsured medical expenses and keep homes in good repair. But all too often, according to the regulators, seniors are poorly counseled in advance and don’t comprehend what they are getting into.

They are misled by direct-mail pitches that imply that reverse mortgages are a government benefit, cost relatively little, never need to be repaid, represent income for life and carry no risk. In fact, reverse mortgages often entail high upfront fees and substantial insurance and servicing charges — well beyond the costs of other financing alternatives that may be available to seniors.

The Chicago Trib, meanwhile, reports that the days of getting your money back for redoing the kitchen with new cabinets and fancy stainless steel appliances are long gone. Remodeling jobs used to pay back at a rate of nearly 87% (in 2005), and the average payback now is 64%.

One estimate has it that you’ll get only about half the money back you put into an upscale bathroom renovation. So basically, you’d be flushing the other half of your remodeling budget down the toilet.