Reverse Mortgages May be Great for Some; Not for All

By
Real Estate Agent with F.C.TuckerEmge Realtors, LLC

You’re at home watching TV and trying to unwind, when all of a sudden here comes another baby boomer celebrity, looking into the camera, giving you his most sincere, trustworthy look, then assuring you that a “Reverse Mortgage” really isn’t too good to be true (even though it sounds like it is).

What could be better? Any homeowner 62 or older can apply: then the bank pays you instead of the other way around! You could even use part of the tax-free proceeds to pay off the other mortgage! Or go to Monte Carlo and break the bank! (The trustworthy celebrity only hints at that one). You don’t have to pay back the loan until blah blah blah, the property remains yours, etc. etc. etc. What could go wrong?

Short answer: quite a lot, actually.

Long answer: if you don’t plan for the long term consequences, this can be a potentially disastrous maneuver. As a quick and painless way to raise cash, it often is too good to be true.

For openers, the actual name of this loan is not ‘reverse mortgage’— it’s an HECM, Home Equity Conversion Mortgage—a much more descriptive name. It allows 62+-year-olds to ‘cash out’ the equity they’ve built in their home. Not all of the equity; just some.  As soon as they no longer live in the home, the loan must be repaid in full. The problems are all in the details.

Detail 1: Payback

Suppose a husband and wife live in a house owned by the husband. He applies for reverse mortgage, dies 11 years later, leaving the house to his wife. Because the reverse mortgage becomes payable when the mortgagee (the husband) “leaves” the property, the loan becomes due and payable. So the spouse may be forced to sell the home in order to repay the loan. But it’s also possible that the same thing occurs when the mortgagee is permanently relocated to a nursing home.  

Detail 2 (and it’s one you really have to take into account): Interest

Most often, no payments are made on reverse mortgages. Unless the trip to Monte Carlo ended well, it’s likely that the balance owed remains. However, interest accrues on the loan at the “prevailing rate”—which may be a misnomer, because reverse mortgage interest rates are often high. Over the long run, the amount owed could eat up most of the value of the house. The spouse could be left with very little to live on.

While the fees charged for a reverse mortgage are capped by the government, they’re still much higher than those for traditional loans (possibly why the trustworthy boomer celebrity got involved in the first place). Because credit scores aren’t used to determine eligibility, higher fees are charged to help cover lender risk. Then there are requirements for keeping up the property (what if illness causes a temporary lack of attention?), paying taxes on time…and other circumstances that could cause the loan to be called in, forcing sale of the home.

Yes, a reverse mortgage can be a valuable resource for some retirees on limited incomes. However, before even thinking about committing, it’s vital to sit down with a trusted financial adviser. If it turns out that selling or downsizing makes a lot more sense, calling me is the next step!  You can reach me on my cell phone: 812-499-9234 or email: Rolando@RolandoTrentini.com

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Margaret Goss 12/02/2014 12:04 AM
Topic:
Lending / Financial
Tags:
reverse mortgage
indiana
real estate
mortgage
evansville
selling of home

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Rainmaker
147,342
Rolando Trentini
F.C.TuckerEmge Realtors, LLC - Evansville, IN

Raymond, thank you for pointing this out. 

Dec 01, 2014 03:14 AM #3
Rainmaker
147,342
Rolando Trentini
F.C.TuckerEmge Realtors, LLC - Evansville, IN

Corinne, yes this type of mortgage is not for every one.

Dec 01, 2014 03:14 AM #4
Rainmaker
810,969
Kevin Mackessy
Blue Olive Properties, LLC - Highlands Ranch, CO
Dedicated. Qualified. Local.

Seems to be a slippery slope once you get involved in it.  I haven't seen this type of mortgage passed around much in Colorado.  

Dec 01, 2014 06:00 AM #5
Rainer
288,479
Thomas McCombs
Century 21 HomeStar - Akron, OH

I have not seen much of this kind of activity around here in Northeast Ohio, but I may not be aware of it since I have not been involved in any of them.

But it looks like there may be many dangerous situations that might arise without warning. Expert advice is critical.

Dec 01, 2014 07:59 AM #6
Rainmaker
908,388
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Interesting, as I have been hearing good things about reverse mortgages. Before taking celebrities' word for it, baby boomers might want to sit down with a good, financial planner first before committing to a reverse mortgage so they understand fully what they are signing up for. 

Dec 01, 2014 09:54 AM #7
Rainmaker
1,079,829
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Thanks for pointing out the small print in reverse mortgages that make them totally unsuitable for many 62+ people. The good old fashioned way of selling the big house and moving to a smaller seems more prudent than racking up lots of interest and losing equity.

 

Dec 01, 2014 11:03 AM #8
Rainmaker
1,317,601
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

I always thought that the ads did not tell the whole story. I wish there was a way for folks to find out the pros and cons.

Dec 01, 2014 11:35 AM #9
Ambassador
4,300,966
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Rolando Trentini - thanks for all the details about reverse mortgage. And true, it's not for everyone for sure.

Dec 01, 2014 12:09 PM #10
Ambassador
3,680,784
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Reverse mortgages are so little understood, and the devil certainly is in the details.

Dec 01, 2014 12:27 PM #11
Rainmaker
372,704
Julie A. Black
KAUAI DREAMS REALTY Kauai Real Property Specialist - Kapaa, HI
CLHMS, CRS, GRI, Realtor, Broker

I had a listing where the owner paid for the house in cash, got a reverse mortgage with a checkbook attached. One of the adult children wrote checks for the whole equity amount leaving nothing for the other children. It was a short sale that turned into a REO.

Dec 01, 2014 12:36 PM #12
Rainmaker
2,781,913
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Like most things, we should do as much as we can as soon as we can and that's the bottom-line to me.

Dec 01, 2014 03:52 PM #13
Rainmaker
2,781,913
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

Julie A. Black, that is the strangest story I've heard in a while, but I guess it's not uncommon at all unfortunately.

Dec 01, 2014 03:53 PM #14
Rainmaker
3,173,926
Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

This is a little understood product and I've come across several situations as you described in #1 and widows were essentially "pushed out" of their homes.

Dec 01, 2014 08:48 PM #15
Rainmaker
280,179
Jeanne Gregory
RE/MAX Southwest - Sugar Land, TX
The most important home I sell is YOURS!

Truly an American "quick fix" for the problem.  Didn't think to save for your retirement? We gotta fix for that.  Oh, and lets get some over the hill actor to lend "creditability" to it. 

Dec 01, 2014 10:03 PM #16
Rainmaker
2,474,806
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

I am suspect of anything that claims to help someone while tying up their assets

Dec 01, 2014 10:21 PM #17
Rainmaker
1,091,181
Margaret Goss
Baird & Warner Real Estate - Winnetka, IL
Chicago's North Shore & Winnetka Real Estate

Good information on the pitfalls of reverse mortgages.  I didn't know that the interest rates were higher but it makes sense.

 

Dec 01, 2014 11:58 PM #18
Rainmaker
76,546
Bruce Minter
James & Lee Realty - Virginia Beach, VA
One on one - Every step of the way!

Just a couple of points.

Folks are stating here they wish there were a way for people to get the straight story or sit down with a financial counselor. You must go through independent third party counseling on the pros and cons before you can obtain a reverse mortgage. 

The heirs will have 12 months to sell or refi after the fact.

This is an FHA product and the interest rate may be a half percent or so higher than a normal mortgage

Raymond is quite right on the law change regarding surviving spouses not on the deed.

MIP insures heirs won't be underwater from the interest accruing when the time comes to liquidate the property. I was given a stat by a Reverse Mortgage Specialist that I send my senior clients to for additional information that is 98% of all reverse mortgages have remaining equity when it come time to liquidate. Most aren't doing this at age 62, they're doing it in their late 70's and 80's to help with medical costs or ease cash flow late in life so they don't have to choose do I buy groceries or do I pay for my prescriptions. So the reality is the later in life this option is excercised the less interest will accrue. And it may also benefit heirs that can not afford to contribute to that persons well being because of boomerang kids or their own life crisis. They don't have to feel quilty about not being able to help out. 

Absolutely right. They are not for everybody. But for many this is a lifesaver and another tool in retirement planning in the same way people put money into stocks and bonds people put money in their homes that in the long run show modest appreciation and a decent return on house payments made.

If you are a senior in the Hampton Roads Virginia market and need solid advice   on buying, selling or the benefits of a reverse mortgage that, by the way, can also be used to purchase a property with approx. 50% down and never have another payment, call me direct at 757-362-2229. I have helped many right here in my own 55+ active adult community.

 

Dec 02, 2014 03:33 AM #19
Rainer
256,145
Dinah Stallworth-Lewis
Priority Real Estate LLC - 800.978.4847 - Natchitoches, LA
NATCHITOCHES, LA HOMES FOR SALE

Roland,

Reverse mortgages are not for everyone.  I agree with Bruce Minter all reverse mortgage clients must have counseling. 

Dec 02, 2014 10:21 AM #20
Rainmaker
2,576,315
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

While reverse mortgages aren't for everyone, I have known a number of folks who have benefitted greately from them.  Bruce Minter mentions many of the pros and cons in his comment.  Especially, the third party counseling.  The reverse mortgages of today are not the frightening products they were in their earlier years.  

Dec 02, 2014 02:01 PM #21
Rainer
333,502
Frank Castaldini
Compass - San Francisco, CA
Realtor - Homes for Sale in San Francisco

I just never felt these were good products, yet sometimes it might be helpful.  For the most part I would stay away from them.  I don't want to be in something that hopes I die before it runs out. 

Dec 04, 2014 01:39 PM #22
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