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.
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.
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.