On the Web
August 27, 2013
Reverse Mortgage Article Hits Nerve
Readers reacting to a recent blog post about reverse mortgages fiercely debated the financial product’s pros and cons, which they felt were missing from the article.
The July 25 article noted that fewer than 55,000 older Americans in 2012 used the federally insured loans. The advantage of a reverse mortgage is that Americans age 62 or older can borrow against some of the equity in their homes to generate much-needed income or create a financial cushion. The principal and interest are repaid when the retiree or his children sell the house.
Even though reverse mortgages are rare, the topic hit a nerve with readers, including lawyers, brokers, and people with elderly parents.
A mortgage broker named D. Gardner, for example, said that he’s often seen people use reverse mortgages to maintain a lifestyle they can’t afford, eliminating a financial option they may need later in life.
For some borrowers, he said, a reverse mortgage “was a means to paper over problems.”
But JP, a former reverse mortgage executive, said a reverse mortgage allowed his parents to pay off their traditional home loan. Free from the monthly payments, they were able to preserve their investment portfolio.
One reader thought it was important to note that reverse mortgages are affected by one factor that also impacts traditional mortgages: changing interest rates. For reverse mortgages with adjustable rates, a higher rate will more quickly eat up any remaining home equity.
The responsibilities of homeownership also do not change with a reverse mortgage, another reader said. The homeowner shouldn’t take one out if they still can’t afford to pay the taxes or maintain the property.
Reverse mortgages, like traditional mortgages, also carry fees. Jerry Peterson, who originates them, said fees are a key consideration for older borrowers. The mortgage insurance premium required for the two types of reverse mortgages available is 1.25 percent (paid annually) of the loan balance, which grows every year as interest accrues. One type of mortgage, known as the Standard, charges another 2 percent of the appraised house value (paid upfront).
One criticism of reverse mortgages that Peterson doesn’t buy, however, comes from homeowners’ children. He said some are concerned their parents will deplete the equity they might otherwise get when their parents die.
“Are we all put on this earth to build up a nice equity in our homes, and then scrimp and save so we can give this equity to our kids?” Peterson said.
Several readers advocated using a reverse mortgage, but they had three suggestions for anyone considering one:
- Get the facts.
- Discuss it with a trusted friend or family member.
- Buyer beware.
For a primer on reverse mortgages created by the Center for Retirement Research, click here.
As with any financial product, there’s potential for fraud. To read a consumer advisory about reverse mortgages by the U.S. Department of Housing and Urban Development, click here.
Not too impressed with your primer, which leaves out a very important issue — what if the value of your house is not enough to pay off the loan when you die or sell? Who gets stuck with the loss, the lender, the estate, the kids who inherit? As we have all learned by now, home prices can most definitely decline — a lot.
Maynard, a reverse mortgage is a non-recourse loan; no one gets “stuck”. The shortfall, if any, is part of the mortgage insurance paid by the borrower over the lifetime of the loan. This is, in fact, the beauty of having this type of loan. It protects the heirs from ever paying more than the value of the home to settle the loan.
These responses come from those who are uninformed about these loans. I have been a reverse mortgage loan officer for over 10 years. In the beginning, I believed if enough people did these loans, they would sway the uninformed. The worst are attorneys and financial advisors. Fortunately, we now have financial advisors recognizing the value. Readers show their ignorance with their comments. I invite them to contact me. I love to get the uninformed on board!!
This product has historically been expensive and mostly used by the “needs based” borrower (someone who uses it as a last resort), but there are new more efficient ways to use it that apply to a wider range of retirees. In particular, setting up a line of credit (but not drawing it upfront) as a hedge against market downturns can be useful to people who have prudently saved for retirement.
You can use our free calculator here:
Hope this is helpful.
Steve C. raises a good point: Those who least need a reverse mortgage may often be in better position to benefit from one.
Entering into new debt with a reverse to create a new asset may work for some seniors. For example, I had one borrower use proceeds to buy a rental property in a good neighborhood at a bargain price. Another used funds to buy a steeply discounted vacation condo. Another set up a credit line to make draws for monthly income vs. selling IRA mutual funds shares while the market was down.
The use I like, but have yet to see, is using the reverse to buy a multi-family unit. You live in one, rent out the others for income. Last time I checked, you could use a reverse for up to a 4-unit property.
Still, there are cautions and risks, especially when used as a last resort for seniors otherwise hard pressed financially.
Everything you wanted to know about reverse mortgages is at the AARP website. I believe that they are an unbiased resource for information.
In recent articles about reverse mortgages in the AARP magazine, they report on lawsuits and threats of eviction for surviving spouses due to fraud or inaccurate titling of property and mortgage documents.
It is caveat emptor for reverse mortgages.