Photo (cc) by Rusty Clark
Reverse mortgages are growing in popularity now that the big baby boom generation is entering its silver years.
A reverse mortgage is a type of loan that lets you borrow some of your home’s equity. The twist is, no payments are required until the last surviving borrower dies or sells.
Boomers in financial distress
The new surge in equity borrowing is partly a legacy from the recession, which wounded the boomer generation financially. But even before then, boomers (and nearly half of all American workers) were short on retirement savings.
Reverse mortgage borrowing grew by 20 percent between 2012 and 2013, Reuters says, adding:
Many retirees haven’t saved enough to cover expenses for the rest of their lives. But many of them have one major asset — a home.
The oldest boomers turn 68 this year. The concern is that many are using reverse mortgages to drain their home equity too early, leaving them nothing to fall back on in 15 or 20 years. In a 2012 report to Congress in 2012, the Consumer Financial Protection Bureau said younger borrowers are increasingly using reverse mortgages to pay off debt, even before retiring.
You must be at least 62
To qualify for a reverse mortgage you must be at least 62 and have paid off your mortgage or have substantial equity in your home. Depending on the loan type, loan proceeds can be received as cash, a line of credit, or monthly payments.
The amount you can borrow depends on your age, your equity, the type of reverse mortgage and the interest rate on the loan. In the best case, homeowners can stay on for decades, enjoying the money with no need to repay until they die or sell.
Here are resources for learning more:
- In this article, Money Talks News founder Stacy Johnson explains how reverse mortgages work.
- The Consumer Financial Protection Bureau explains eligibility.
- AARP lays out the pros and cons.
- The Federal Trade Commission has a detailed explanation.
- ElderLaw explains the risks.
Lifeline or risk?
Reverse mortgages are particularly complicated loans. They’re not good for everyone, and so a borrower’s entire financial picture needs to be considered. A reverse mortgage taken in desperation can even make things worse, certified financial planner Sean Keating told CNBC:
“When an older couple cannot afford to live in the home anymore, getting a reverse mortgage will only delay the loss of the house and will leave them with no assets,” he said.
Better to sell the house and downsize, move in with a family member, take on a roommate or explore whether one of your adult children might be willing to purchase the family house through an installment sale, Keating added.
Because of the risks, the federal government (which funds most of these loans) requires borrowers to get financial counseling first, so they know their options and understand what’s involved.
Among other risks:
Fees on reverse mortgages often are steeper than on conventional mortgages. There are closing costs, an origination fee, mortgage insurance premiums (on some federally insured loans) and other fees. Reuters says:
The margins on selling these loans can be three to five times the margins on regular mortgages, said Don Currie, president of lender High Tech Lending. Banks can also collect fees for performing tasks like sending out account statements to borrowers.
Falling behind on taxes and upkeep
Even though you don’t need to make payments, with a reverse mortgage you still own the home. Your name is on the deed. That means you have to pay taxes and insurance and maintain the property. If you fall behind on these, you could lose the home.
High interest rates
Interest rates are higher on reverse mortgages than on 30-year fixed-rate mortgages. The average rate on conventional mortgages is 4.4 percent now. But you could pay a bit over 5 percent on a reverse mortgage, Reuters says. Over time, even that seemingly small difference adds up.
Your kids may lose their inheritance
When a borrower dies, the lender takes its share of the proceeds to cover the loan, interest and fees. What remains, if anything, goes to heirs. But the kids may be left with nothing. If you hope to leave your home to your heirs, a reverse mortgage could put that plan at risk.
Also, The New York Times reports, some heirs who want to pay off their deceased parents’ reverse mortgages aren’t getting the chance to do so.
Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages.
Other family members have run into bureaucratic walls trying to get lenders to tell them how to keep their family homes, the Times says.
Upon their husband’s death, some widows have been devastated to learn that their names were not on the reverse mortgage.
“If both spouses are not on the reverse mortgage deed and the spouse who is on the deed dies first, the surviving spouse would be required to repay the mortgage loan in full or face eviction,” says ElderLaw.
“If you are not facing a financial emergency now, then consider postponing a reverse mortgage,” says AARP. Here are some alternatives:
Home equity line of credit or home equity loan. Fees and interest rates are likely to be lower with these loans.
- A line of credit lets you draw chunks of money up to your approved limit, charging interest only on the amount withdrawn.
- With a home equity loan, you are given the money all in one chunk and you start paying interest on the entire amount immediately.
Ask yourself before getting one of these loans: Can I afford to make the monthly loan payment?
Sell your home. Selling puts the entire amount of your home equity into your pocket (minus the costs of selling). The question here is, do you have enough equity in the home to make selling worthwhile?
Low-cost senior loans. You may qualify for one of the low-cost housing rehabilitation grants and low-interest loans. The money can be used to correct a home’s safety or health problems or make it handicap-accessible. These federal loans are administered by states’ aging services divisions. Find your state’s agency at the bottom of this page.
Have you borrowed using a reverse mortgage? Would you recommend it to others? Post a comment below or at Money Talks News’ Facebook page.