A look at reverse mortgages
Photo by: scjody
While reading the local newspaper a few weeks back I came across a short blurb in the financial section about reverse mortgages and their recent surge in popularity with older Americans. The New York Times reported that there’s now a $20-billion-a-year industry in reverse mortgages, with “elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier.”
I had never heard of a reverse mortgage and decided to do a little research about them Here’s some of what I learned:
What is a reverse mortgage?
A reverse mortgage is a loan, only available to seniors (62 and over in the United States), that allows a homeowner to convert a portion of their homes equity into cash. A reverse mortgage is different than a traditional home equity line, in that repayment isn’t required until the home owner(s) no longer use the home as their primary residence, die, or the home is sold.
Let’s walk though an example to show you how a reverse mortgage works. You own a home and it’s market value is $250,000. You owe $100,000. This means you have $150,000 of equity that is available for use using a reverse mortgage. Let’s say your current mortgage payment is $900 per month. A reverse mortgage could provide a $100,000 loan and pay you $900 per month. This $900 per month payment from the reverse mortgage could be used to pay your monthly mortgage payment.
Why a reverse mortgage?
Reverse mortgages are generally sought after by seniors that have the majority of their net worth in their home, a scarcity of cash, and a low income due to poor retirement income and low social security. Reverse mortgages promise to provide seniors a way of supplementing their income using the equity they have in their homes. Sounds great right? Read on…
Should you get a reverse mortgage?
While reverse mortgages seem like a good idea, I’m skeptical. If you’re a senior and you’re strapped for cash, it would seem a better idea to just sell the house and invest the cash. The argument could be made that a house is an investment. Generally this is true, but this is particularly untrue in our current declining housing market. My other concern is that instead of leaving your children a home, you would be leaving them with a mortgage to pay off instead.
During my reading of various articles and other financial expert’s perspectives, I also found that the reverse mortgage industry is full of crooks that would love to get their hands on the money and equity seniors have built for themselves over the years.
Before risking the potentially hundreds of thousands of dollars invested in your home, do your homework and make sure you aren’t being scammed. HUD provides a list of HUD approved reverse mortgage lenders. The Washington Post quoted a study released by the AARP stating: “nearly one in 10 reverse-loan borrowers had other financial products recommended to them by lenders, usually investments, annuities or long-term-care insurance.” This is a BIG mistake and a common sales pitch from less than credible lenders.
Reverse mortgage loans are also high cost loans. Consumerlaw.org states: “Origination fees and insurance premiums typically eat up $25,000 or more of the total proceeds of a common reverse mortgage on a $250,000 house…. Interest charges, which pile up over the life of the loan get added on top of that.”
With all of this in mind, major US newspapers are reporting that overall, seniors that have reverse mortgages are happy with them.
Read more about reverse mortgages here:
- Top Ten Things to Know if You’re Interested in a Reverse Mortgage
- Wikipedia on reverse mortgages
- The Good, The Bad, and The Reverse Mortgage
- A New Kind of Loan: In Reverse