It's time for Tricks, Treats, Ghouls and Goblins and spooky stories... so I thought I'd write about the horrors of reverse mortgages.
We hear respected and beloved celebrities pitching reverse mortgages to seniors as safe, secure and government insured loans that can make your retirement bliss. Then we see articles and headlines about an elderly, sick grandmother being kicked out of her home by the big bad bank, or how evil Johnny scammed his grandmorther into getting a reverse mortgage so he could gamble all her money away.
Who does one believe? Where can you find out the facts? Let's go trick or treating.
First the trick,
Reverse Mortgage horrors….“I know someone who lost everything to a reverse mortgage!” Don’t nod and walk away, look deeper. I had a letter just last week from a woman whose mother got a reverse mortgage back in 2007. The woman asked me to call her as she was desperate to help her mom. So I did. “Debbi”, she said, “My mom borrower $230,000 on her home with a reverse mortgage and now the money is gone!!” As we looked into it further we found that a possibly “unscrupulous” financial advisor convinced her mother to get the reverse mortgage and invest all of the loan proceeds with him in several products. She bought a life insurance policy, an annuity and invested in a real estate scheme with him. Some of those investments may still have cash value that she can recoup, BUT, in my opinion she was foolish with her reverse mortgage funds. She could have taken it as a growing line of credit to draw from only when she needed extra money, or perhaps set it up where the reverse mortgage paid her a monthly payment for life. Instead she took it all in cash and then made some bad decisions by placing her trust in a bad man. That doesn’t make the reverse mortgage bad, just an improperly used tool. Some might think we shouldn’t allow reverse mortgages to give seniors that much cash - because they could be scammed or might fritter it away. But, I can’t beleive that just because someone turns 62 they become stupid. The truth is that everyone who gets a reverse mortgage must pass a HUD Approved Counseling Session. During this session they learn how the loan works and the different options they have for using it. Be sure to work with an honest, reputable loan officer. Check them out! Research their background. Ask for references! Be a smart saavy shopper.
Another horror story that happens with reverse mortgages is when a younger spouse is convinced to go “off title” to the property, signing a deed to the property over to their spouse (usually older) who can then qualify for more money on the reverse. This may sound great when you are seeing only dollar signs, but the risk is HUGE! Do not do it! Once the borrower dies, the loan becomes due and payable and what is the surviving spouse supposed to do? Can she refinance? maybe. Does she have cash to payoff the loan? probably not. Does the family have funds to help out? I doubt it. So, the bank forecloses and the surviving spouse is kicked out of the home to go where? It makes for some pretty bad headlines, and is one reason some of the big banks got out of reverse mortgages entirely.
Expensive - I hear all the time, “reverse mortgages are too expensive!!” Expensive is a relative term, so I will ask, “Expensive compared to what?” A home equity loan? You’re right - a home equity loan is a much cheaper loan to get than a reverse, but it comes with monthly payments and income and credit requirements. I have done many reverse mortgages for folks who first got an equity loan then used it all up and could not afford the payments on it. Also, a traditional equity loan is subject to the banks whim when home values decline, or the borrowers credit takes a hit, the bank can and will cutoff the line of credit at any time. A reverse mortgage line of credit though is guaranteed, no matter what happens to home values, your line of credit is there for you. Not to mention the fact that a reverse mortgage line of credit grows over time! This means more credit is available to you as you age, when you will need it most. That feature alone is worth the additional costs of a reverse mortgage. The best comparison, cost wise for a reverse mortgage is to compare it to other FHA loans. A reverse mortgage is an FHA Insured loan and therefore carries with it the additional cost of Mortgage Insurance Premiums, both upfront and ongoing. This insurance protects the lender from loss - which means low risk for the lender. Low risk means……. low interest rates, a good thing! Uninsured private reverse mortgages can run 9% to 10% or higher because of the risk to the lender.
Now the treat.
Let me tell you the truth about Reverse Mortgages. First of all they are neither bad or good. They are a financial product. A mortgage is a loan that is secured/collateralized by real estate, in this case by the homeowners primary residence - their home sweet home. Does the bank own your home? No, they have a loan against it and they charge you interest on that loan. Every month you send them a payment and during the first half of that loan (15 years usually) the biggest part of your monthly payment goes to interest. That’s why it takes awhile to make a good dent in your loan balance.
A reverse mortgage is also a loan against your home, but instead of making monthly payments of interest and principal, the interest and MIP* just keeps accruing to the balance.. You NEVER have to make a payment as long as you live in the home. Why could this be helpful to a senior? Because, now they can keep more of their income (read social security/pension/retirement) to buy food, pay utilities, and have less financial stress. Most of us expected to have our homes paid off by the time we turned 62, the sad reality is that most of us do not. In fact many boomers still have 15, 20 and 25 years left to pay on their mortgages. In some cases, not having that mortgage payment could mean the difference between a balanced budget and bankruptcy.
A reverse mortgage is a non-recourse loan as well, meaning that when the time comes to pay it off. should there not be enough home value to cover the loan, the bank will go to HUD-FHA to make a claim for the difference and the heirs will have no liability for any repayment. The lenders only recourse for repayment is the home itself. The worst that can happen to the heirs is that they get nothing from the home.
The best advice I can give you about getting a reverse mortgages is to do your research, shop around, check out your loan originator, get references and check out their reputation. That is probably good advice for any large financial transaction.
As always, I treasure your feedback. Thanks for reading!
*interest and ongoing Mortgage Insurance equal to 1.25% annually of the loan balance is accrued to the loan. Each month borrowers receive a mortgage statement showing the previous months balance and the new balance with the detail of amounts accrued for interest and MIP, as well as available funds in the line of credit, if any.