Today's edition of the Journal News, a regional newspaper partnered with USA Today, featured a front page article about reverse mortgages. Using analysis from USA Today, the article shows how several lenders focused their reverse mortgage origination activities on largely black neighborhoods in big cities around the nation. The resulting wave of foreclosures triggered by reverse mortgages has been a crushing blow to the finances of families and relatives of the former-homeowners.
It’s hard to miss former movie stars touting the advantages of taking out a reverse mortgage, and many an elderly senior has been taken in by their seeming trustworthiness and honest demeanor. The appeal of staying put in their own familiar home, vs the upsetting prospect of moving is a large carrot to dangle in front of an insecure senior.
In the past 12 months I have experienced some terrible situations brought about by the reverse mortgage scenario, yet even when I outline the drawbacks to clients considering the option, many seniors are still drawn in by what they think is a great solution to the fear of change. While reverse mortgages can be a useful retirement alternative for some to boost income, eliminate debt or improve their retirement lifestyle, there are some serious potential downsides.
What really is a reverse mortgage?
A reverse mortgage is actually a loan you take out against your home. You must be 62 or older to take on out, and the amount you borrow is determined by your age, the interest rate and the value of your home. Some come with restrictions on how much you can borrow, (HUD loans allow only 60% of the value of the property) and they come with lender fees, like any loan.
The up-side is the borrower doesn’t have to repay the loan until he or she dies. Heirs can pay the loan, or can sell the property, in which case the proceeds satisfy the loan even if the value of the home falls short of the outstanding balance. If it sells for more, the excess goes to the heirs.
Reverse Mortgage Downsides
Sounds great, right? For some it is. But homeowners need to keep in mind that they still have to pay homeowners insurance, property taxes, and keep the home in good repair. Also, the upfront fees on a reverse mortgage can be quite high, so if borrowers don’t plan on staying in the home for a long time, a good bit of the home equity will go to fees, with very little benefit to the borrower.
Fees attached to most reverse mortgages include the usual appraisal, title search, inspection, fees that go along with most loans. Then there are the fees imposed by the HECM program itself: a mortgage insurance premium of 0.5% of the home’s value at closing (2.5% if you take out more than 60% of the maximum loan amount). On top of that is the annual mortgage insurance premium of 1.25% which is added to the interest rate on the loan.
One of the tragic things that often comes up is if one spouse is not listed as a borrower on the reverse mortgage. When the borrowing spouse dies before the other, the surviving spouse may be forced from the home to repay the reverse mortgage. It’s sad to see elderly people forced to sell their home and be pushed out on the street. If the home’s value has depreciated, they will get little or no good out of their lifelong investment. This issue is currently in court, but HUD has issued a ruling that allows a non-borrowing spouse to remain in the house on all its reverse mortgages issued after August 4, 2014.
Also, anyone living in the house with the borrower who is not the spouse (such as adult children or other relatives,) or someone who marries the borrower after the reverse mortgage is issued may not remain in the house after the borrower dies unless the loan is paid off.
There are other ways for seniors to draw on the equity in their home. The most obvious is to sell the home and move into a smaller, less expensive house. That would mean moving, but it would allow homeowners to move to a less expensive part of town, state or even a different country.
Depending on the value of the downsized new home and the equity in the old one, retirees could own their new home free and clear, and have a pile of money to boot. And they would still have the option to get a reverse mortgage later on.
Fantasy Real Estate Problems
Selling is often the best option for “cashing out” the equity in a house. But very often, elderly sellers hold an inflated view of the value of their home, and are not easily dissuaded by the facts of the market. After all, they’ve toiled for years keeping the property up, updating and adding features which they believe MUST increase the home’s value. They LOVE their home and “aren’t going to give it away!!!” How often I’ve heard those words.
But to sell, a home must be priced right. If my CMA’s (Competitive Market Analysis) and advice about the state of the market in their area goes ignored by sellers, I suggest ordering a certified property appraisal. This is an unbiased analysis that gives a true assessment of the fair market value of any home. It can assure the sellers that the “price is right,” and lead to a quick sale and a happy retirement.