Reverse Mortgages Costing the Unwary Their Homes

Category: Financial and taxes in retirement

December 4, 2012 – You’ve probably seen the ads for reverse mortgages- “Use the cash in your home to solve your retirement money problems”. They sound simple enough – instead of you sending money each month to your mortage company, they send you a check! At the end of a specified period, after you either sell your home or have joined the big Kahuna in the sky, the payments are finished and the mortgage company gets paid back.

Unfortunately, as the New York Times recently reported in “Reverse Mortgages Costing Some Seniors Their Homes“, it’s not always that simple. Most companies offering reverse mortgages are legitimate and trustworthy, but as smaller companies with questionable ethics enter the market, there is also a lot of high pressure salesmanship and hype. The combination often results in unwary and poorly qualified consumers taking out reverse mortages, who sometimes lose their homes as a result. This article will get into the details so you can be an educated consumer.

The Basics
Used correctly, a reverse mortgage can be a great way for retirees in certain situations to stay in their home and have enough money for retirement. You have to be at least 62 years old and own your home outright. Basically you are taking out a loan against the value of your home; you don’t have to pay it back until you sell or die. There is a limit to how much of the home value you can borrow against. About 70% of people take out the money as a lump sum, which can be too much of a temptation for many. According to the government there are more than 775,000 such mortgages in existence.

Initially popular, the concept has faded with many of the big players like MetLife, Wells Fargo, and Bank of America leaving the business. Increasingly they have ceded the market to smaller players, similar to what happened in the home mortgage bubble of the last decade. The payments the company makes to you can either be a lump-sum loans, which carry a fixed interest rate, or a line of credit with a variable interest rate. Many experts advise against the former, as interest costs can mount up quickly and cause you to lose your home.

Problems
The type of problems that consumers are having with reverse mortgages are eerily familiar to the mortgage boom of 2005-6:
– Unscrupulous lenders entering the market
– Unqualified applicants are encouraged to apply
– Less than full disclosure about the risks
– Untrue promises “that you can’t lose your home”
– Hidden and high fees
– Encouraging customers to use the money to take a vacation or unsuitable use


Problems with Who Signs the Agreement
One of the big problems that regulators see is where salespeople encourage the older person in a couple to be the sole signer of the mortgage documents. This is risky for the consumer, but salespeople set them up that way because that allows them to make more money. It’s riskier for you because if your spouse dies and falls behind on the payments, the mortgage company doesn’t have to agree to renegotiate terms if your name isn’t on the loan. The result: you could lose your home to foreclosure. The company might tell you that you can add the other name later, but that is not usually true. The same problem has been happening with conventional loans, see “Mortgage Catch Pushes Widows into Foreclosure“.

Is a Reverse Mortgage Good for You
There are many situations when a reverse mortgage might make sense for you. For example if want to continue living in your home but need money to be able to do so. But in many other situations you might be better off selling the home and moving to a more appropriate residence for your age, either cheaper (independent living) or more expensive (assisted living). See References section below for articles about the positive side.

Before you take out one of these mortgages make sure you know what you are getting. If there are high pressure sales tactics – walk! Don’t sign anything without getting advice from your attorney and/or tax adviser.

For further reading:
Reverse Mortgage Might Be in Your Future
FAQs About HUD Reverse Mortgages

Comments? Have you had experience with a reverse mortgage, or are you thinking about one. Please share your experiences and opinions in the Comments section below.

Posted by Admin on December 3rd, 2012

9 Comments »

  1. once again, if it sounds too good to be true, it probably is. 🙁

    by susan — December 5, 2012

  2. While assisting my 83 year old mother-in-law obtain a reverse mortgage in 2006, I was informed by the bank representative that the average ‘life’ of a reverse mortgage loan was between 2-3 years. I was quite surprised, but in reality my mother-in-law passed away 2 1/2 years after obtaining the loan. The up front costs of this loan were substantial, somewhere in the neighborhood of $18K on a home valued at $225K, but those costs could easily be taken out of your house equity so you didn’t have to come up with these up front costs. Oh it was all made so easy. On the plus side, there was required counseling and once she was evaluated, she learned of all of the other programs available to her from the municipality to help her to remain in her own home. It truly was a God Send at the time.
    Fast forward 6 years to today, and I am very concerned about the number of Baby Boomers who are now using the ‘reverse mortgage’ tool as a means of obtaining cash now to meet their ‘wants’ . . . yes that is ‘wants’ not ‘needs’. I have seen friends use these funds for world travel, vehicles, jewelry etc. As a real estate agent I am very concerned we are setting ourselves up for another ‘financial and housing crisis’. Someone in their sixties has many more years then the anticipated ‘2-3 year’ life of a reverse mortgage. If someone has lived into their sixties and finds themselves on the doorstep of retirement and hasn’t planned, or learned to cut back, or save, than what makes you think their habits will change now? Using a reverse mortgage as a funding source is not going to help for the long term? I can see a ‘nouveau homeless’ segment of society when these applicants find themselves without house or savings as they approach their 70’s! The ‘reclaimed’ houses of ‘reverse mortgages’ could easily be the 2020’s replacement for the 2010’s ‘foreclosure debacle’:roll: we are witnessing! In a world where many children no longer care for their parent(s)and future COL increases of SSI are questionable, where will this leave them? If the banks will allow a reverse mortgage based on 80% of the value of the property, and the market continues to drop (we’ve already hit 30% decline in many markets), then who is the real winner here? Certainly not the Boomer, but the Bank, AGAIN! Please think long and hard before you rush into these programs and ask plenty of questions so you completely understand what you are doing before signing on the dotted line. And it would never hurt to have a solid back-up plan. 😉

    by Jane — December 5, 2012

  3. Jane,
    I just read your post on reverse mortgage. The banks are always looking for a way to screw their customers! Thank you for the valuable information. 😡

    by Skip — December 6, 2012

  4. Hi Jane and what a great post! I recently retired in the Kansas City area with the Sheriff’s Office. Several years ago I was assigned to the Civil Division and served multiple foreclosures, evictions, and summons/petitions for non payment of credit cards. Many people I saw over and over. They were not bad people, life seemed to happen to them and it became a house of cards. In the late 90’s it was easy in my position to see the housing market of recent years was predictable. Not only was this a motivation for me to never carry a credit card balance, but to only buy a house that I could afford. I completely agree that we are responsible for our own poor finanacial decisions. Having said that I don’t understand why the banks are not held as accoutable. There were so willing to loan individuals $300,000 to $400,000 on a $50,000 income (just for example). The loan officers and look and see the other open lines of credit, car payments, etc. and yet they still approved this stuff. Why is their no accoutability for them. Remeber the days when you truly had to be worthy to get credit? So Jane your example of reverse mortgages is dead on! I think we are going to pay a big price, or our kids will, for the greed of the banks and even some seniors who have a sense of entitlement. Mortgaging your future is a dangerous place to be when you know your income is limited. Why not sell, downsize, and live within your means. Yes I enjoy an early retirement from a very demanding job. But, I still work and plan to do so as long as I can. I plan to be the 80 year old standing at the door of Wal Mart. There is nothing wrong with enjoying the fruits of your labor, but to do a reverse mortgage I think you are setting yourself up for a bad situation in the future.

    by David — December 7, 2012

  5. […] For further reading: Pension Loans Trap the Unwary Reverse Mortgages Costing the Unwary Their Homes […]

    by » HUD Programs Has the Facts About Reverse Mortgages Topretirements — February 4, 2014

  6. as usual there are two sides to every story…A reverse mortgage purchase may be the answer for some..for me it is…At age 62 and just retired purchasing a 300K home my required down payment is 140K…I must pay the taxes and insurance but other than that no payments for me or the wife she is 63 and on the loan..A VA loan for 300K payments are approxiamately 1900 per month..If I and my wife lived 25 years that would be 570K versus the 140K I had to pay..A 430K savings..Once we are both gone the estate has 1 year to sell home and pay off loan, the 160K difference plus interest…the balance left is the estates or if there is not enough to pay off loan it is forgiven…So for some this could be a good deal…

    by Paul — February 5, 2014

  7. To Paul..just wanted to get a little deeper into your ‘reverse morgage’..with emphasis on the stement in part “estate has one year to sell”..well I have read that that one year is a negative,,specifically, if it is not sold iin one year then the morgage owner can sell at a price to cover the loan final payment..and it was in the article that they often just sell to cover the loan premium..as any money after that goes to estate and that is far from their concern…
    maybe more planning should consider that as it is often longer than a year to sell..
    food for thought..but I must say I am far from an expert in providing advice..just my understanding..thanks
    Robbie

    by Robbie — February 6, 2014

  8. Robbie…thanks for responding..On a 300K loan after the required downpayment the balance after 20 years is still lower than what a typical sale of your home in a normal situation..As you know if for some reason the sell does not cover loan balance then the loan amount is forgiven…

    by paul — February 6, 2014

  9. […] for Retirement Research: Using Your Home to Pay for Retirement Retirement Downsizing Checklist Reverse Mortgages Costing the Unwary Their Homes MarketWatch: Housing is Biggest Expense for […]

    by » The Retirement Piggy Bank You Are Probably Overlooking - Topretirements — October 6, 2014

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