A look at reverse mortgages
By glblguy
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
March 25th, 2008 at 10:57 am
I have a fundemental disagreement with Money magazine over reverse mortgages. It seems every time someone over the age of 65 writes in with a problem they recommend a reverse mortgage as part of the financial solution. I’m not so convinced.
March 25th, 2008 at 1:02 pm
Thanks for your article. I understand your cynicism, as I see it everyday for the same reasons you noted. Please allow me to respond to them.
“If youÂ’re a senior and youÂ’re strapped for cash, it would seem a better idea to just sell the house and invest the cash.”
I don’t know you at all, but you’re overlooking a very key fact that is common among today’s seniors. Most have lived in their homes for decades, and they wish to remain in their home until the very end. Their homes hold so many memories and represent some very important events in their lives. It’s easy to look at things on paper and say it makes more sense to just sell it, move, find another place, and invest the money. However, for many seniors, they’re not looking to make the most money they can with a savvy business move. They’re simply looking to live their remaining years where they are familiar and comfortable. Reverse mortgages are proven to empower seniors to do just that…with room to spare, financially.
“My other concern is that instead of leaving your children a home, you would be leaving them with a mortgage to pay off instead.
The majority of seniors are still making mortgage payments and die with a mortgage balance. Heirs are often left with having to pay off existing debt accrued by their parents. This is nothing unique to reverse mortgage. While there are some adult children who are self-absorbed to make this argument, most understand that the home and the money it represents actually belongs to their parents. It’s their home and their money before it’s the kids’ inheritance. If the parents need or want it in order to live their remaining years on their terms, good for them. Most seniors entered their adulthood without inheritances, and most people in my generation are doing better financially than our parents ever did. And one last fact. In most cases when reverse mortgage borrowers pass, there is retained equity, meaning the heirs still have money left to them.
“During my reading of various articles and other financial expertÂ’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.”
“Full of crooks”? Do you think the Catholic church is “full of” priests who are child molesters, or do you think it’s just possible that those who are are the ones the media single out as most newsworthy? See where I’m going with this? You rarely see an article in the newspaper or a story on the evening news about the overwhelming majority of people who had a perfectly good experience with their reverse mortgage lender and their infusion of money.
I’m with you in that seniors and their adult children should exercise discretion and discernment when evaluating their options. But the concern should be in what the seniors’ wishes are…not our own. If their desire is to age in place, to spend the rest of their lives where they are comfortable, it just may be that a reverse mortgage is the answer to empower them to do just that.
March 25th, 2008 at 1:08 pm
I find it sad that so many people are out to scam lder people. What does that say about this country?
Lisa
March 25th, 2008 at 1:12 pm
You’re absolutely right, Lisa. It is often more than sad, it’s tragic. That is why it’s important to find trustworthy people with a track record of genuinely caring for seniors…not their trust funds or investments.
March 25th, 2008 at 4:08 pm
I’m with Corey on this one, why should old people have to sell their homes & move out of a neighbourhood they have probably lived in for decades, and the thought that their home is purely their kidsÂ’ inheritance is quite frankly a revolting thought. Most would sell their parents home, and once the reverse mortgage was repaid then they could have their inheritance.
I hope my parents die broke after spending everything they have on enjoying their lives to the full right up to the end of it; I can make my own money thanks.
March 25th, 2008 at 5:59 pm
@Corey – Corey, I don’t have any cynicism about reverse mortgages, but I do have cynicism about debt and poor financial decisions. Are reverse poor decisions? Maybe, maybe not. I would say the fees are high, making them high cost. For someone already struggling financially, this doesn’t seem like a wise decision to me.
Corey, memories are in your heart and head, not in your house. It’s silly to continue to own a home that is a financial burden. It’s just a house.
I also have no issue with parent spending their inheritance. I certainly don’t want one from my parents, but I also don’t want to be stuck with their debt either.
I’d also like to point out that I think you’re a bit bias Corey. From your About page “I am a Reverse Mortgage Specialist serving senior citizen homeowners throughout the San Francisco Bay Area and beyond.”
I have no bias what so ever, and am just presenting the facts about reverse mortgages as I researched them, along with MY own personal opinion of them.
@debtdieter – I agree with you, but I also think it’s very important for us as parents to ensure we don’t leave our children with debt.
March 25th, 2008 at 6:16 pm
Hi. Sorry, I don’t know your name. I know what you’re saying about high cost, however, it’s important to note that not a single penny comes out of pocket…ever. The home pays the debt. You may think this is an over simplistic way of looking at it, and it’s true, ultimately money paid by the home means less to the homeowner/heir upon the maturity of the loan, but it’s a cost/reward thing you need to look at.
When you have a senior who is having trouble keeping up with their mortgage payments, yet they have tens, even hundreds of thousands of dollars in equity, simply retiring the monthly payments provides them enough margin to live comfortably. Suddenly, they’re no longer “struggling financially” without the burden and expense of packing, hiring a real estate agent, finding a new place to live, moving, unpacking and so on. Again, the key isn’t that it makes sense “to me” or “to you”, but “to the senior”. By unlocking the equity in their home, they’re also unlocking their ability to be financially independent. If their kids are more concerned with their inheritance, perhaps they should ask mom and/or dad to move in with them, or start supporting them financially.
Are you able to do that? (rhetorical question, don’t answer).
I see you took a look around my blog. If you read any of it, you’ll read a recent article I wrote about a woman who lost her husband about 2 years ago. In that article, I talk about the story she shared with me about the flood of memories she has by simply walking into her kitchen. Her husband laid the floor in there, and just being in there stirs her so much that she still sits in there and talks with him. That’s a meaningful place to her. So you see, memories can be tangible items and places.
Let me also remind you that heirs are not “stuck” with their parents debt any more than you would be if they had any kind of mortgage/lien against the house at the time of their death. You don’t have to pay a dime. Reverse mortgages are non-recourse loans. In the worst case scenario, you sell the home, use the entire proceeds to pay off the balance, and you walk away in no worse shape than you were before. Even in the case where the reverse mortgage balance exceeds the fair market value of the home, the lender gets the lesser amount. Still…you’re stuck with nothing.
What you consider my “bias”, I consider my ticket to credibility, since between the two of us, I operate in this field every single day of my life. I have counseled people away from reverse mortgage, and I have seen those for whom it has been a true blessing to not only themselves, but their families. My findings are not based on facts, or even anything I read. Mine are based on personal experience.
Are yours?
I’m not trying to sell you anything. I’m simply trying to set the record straight. You have cited several concerns, and I have offered to show you the reality of reverse mortgage…and the lives they have touched. You’re welcome to disregard my comments as “biased”, but you sure would be missing out on some really neat and special people and stories.
March 25th, 2008 at 6:41 pm
I want to make one more comment to your last post. I read your blog a bit more and I see you’re a Christian, as am I. If you saw a post online about Christianity which had some misconceptions about theology or something, would you want to jump in and say something to set the record straight, or would you shy away from it because, as a Christian, you think your words would carry less weight because you have a “bias”? How would you respond to someone dismissing your thoughts because of that?
Yes, I work in reverse mortgage. Since that’s the topic of your post today, I would think my insight would be valued, not dismissed.
March 25th, 2008 at 8:43 pm
@Corey – Your thoughts aren’t dismissed at all, and I read every comment you made. I appreciate you offering your “hands-on” perspective, and to be honest really appreciate it when people comment providing alternative view points and perspectives. It makes the article and my blog in general a more valuable place for my readers.
I did think it important though to make readers aware that you are in the industry. My intent wasn’t to question your integrity or perspective, just to make the readers aware.
I sincerely appreciate your comprehensive and thoughtful comments.
March 25th, 2008 at 10:28 pm
I agree glblguy, saddling your children with your debt is a really bad idea!
I guess I can only speak from personal experience (I’m in Australia by the way) that both my parents and my grandparents both own their homes outright and live well within their means. Here, a reverse mortgage is borrowing against the equity of your home, and the sale of the home upon your death pays back the mortgage. I wouldnÂ’t think youÂ’d be able to borrow the full value of the home, so you wouldnÂ’t come out negatively?
For me, I would expect that all of my older relatives would use anything they had to ensure the best quality of life they can have for as long as they can, and that leaving me an inheritance should be the last thing on their minds.
My grandmother is 93 and still living at home with minimal care. I’m 38, and my parents are in their 60Â’s and already retired, so I expect I’ll be well and truly retired myself if any inheritance was coming my way. By then I expect to be looking after myself comfortably with my own investments and my own paid off home.
March 26th, 2008 at 12:07 am
Hello glblguy. I understand what you’re saying about informing your readers about my status as a reverse mortgage professional, but when you prefaced it by saying you think I’m biased, you did call into question my ability to be objective, and thus, my integrity.
I take my profession very seriously. It is not simply a job, but an opportunity to befriend and help seniors in need. It’s one thing to form an opinion based on what other people say, but until you get to know the people who actually have been involved with reverse mortgages, be they borrowers or lenders, you’re just looking at words on a page. The lives that are touched is what my job is all about.
Be careful not to be so clinical in your opinions that you overlook the lives involved.
March 26th, 2008 at 10:30 am
Wow, so much comment. I read the NYT article, too. I happen to work for a non-profit credit counseling agency that does reverse mortgage counseling. We do not sell any products or accept money from lenders, so our advice is netural. I’m not sure if it is a federal law or if it varies from state to state, but in Pennsylvania senior citizens must undergo a reverse mortgage counseling session before entering into a loan agreement. I would highly recommend a counseling session regardless of the law. Reputable counseling agencies can be found through the National Foundation for Credit Counseling (nfcc.org) and by checking with the Better Business Bureau and your state’s Attorney General office. Education is a huge component when it comes to personal finance.
March 26th, 2008 at 10:37 am
Hello Kristen.
You are 100% correct, and it should be known that this is a requirement on any reverse mortgage. When I am meeting with a prospective client, I always educate them on the program and service you offer. I make sure they understand that your job is to make sure I have done my job in explaining the details and functions of a reverse mortgage. It is also an independent, neutral voice which has no vested interest in whether or not the senior gets a reverse mortgage.
Thank you for making this point, and for looking out for seniors.
March 27th, 2008 at 6:22 pm
I agree with you. I think reverse mortgages can be useful for some people in some situations but in general they are not a good idea. And they have the great potentially for abuse. We have so many examples of people managing finances poorly – focusing only on buying what they want today while ignoring what happens in 2 months, 2 years or 20 years. Reverse mortgages can provide another way for people that make bad financial decisions to do so.
March 27th, 2008 at 6:36 pm
Hi John.
I know exactly what you’re saying about the potential for abuse, but truth be told, just about anything can be used to hurt others when in the hands of a devious person. Just today I read an article about a couple women who swindled homeowners of all ages by creating a scheme which was supposed to help them avoid foreclosure.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/27/BUCEVR033.DTL
While I understand your concern, we are not a socialistic country which can disqualify people from money they’ve earned because we happen to think they might not spend it the way we think they should.
Reverse mortgages don’t “provide another way for people that make bad financial decisions to do so”. Reverse mortgages provide people with money they’ve earned. What they do with it is solely up to them. We do not tell them how to spend it. That’s what their family and trusted advisers are for.
If you have a senior loved one, and you’re genuinely looking out for their best interests, you’ll offer them assistance, I’m sure, so they make very good decisions with the money they can obtain with a reverse mortgage.
Reverse mortgages are inanimate objects. They don’t make people do anything. Reverse mortgage lenders and loan officers don’t tell people how to spend their money. Cars can’t make people not crash into other cars or people. But they can get people from where they are to where they want to be.
So can a reverse mortgage.
March 27th, 2008 at 6:44 pm
Hmmm, I tried to post a reply to John’s message, but it doesn’t seem to have taken. I included a URL to a news story I read today, so maybe that triggered some kind of spam filter or something.
John, I appreciate your concern. You have to understand, however, that just about anything can be used to harm and abuse people. I read a story just today, (the link to which I tried to insert in my original reply), about a pair of women who came up with an elaborate scam to swindle homeowners of all ages with a promise to help them avoid foreclosure.
We are not in a socialistic country. We do not have the right to disqualify people from their money simply because we think they won’t spend it the way we think they should. We do not tell people how to spend their money. That is what their loved ones and trusted advisers are for. It’s good to have accountability. But who are we to say, “sorry, I know you can get $100,000 with a reverse mortgage, but we don’t think you’ll spend it wisely.” If you had a family member or valued friend who came into a lot of money, you would probably offer your expertise and friendship to help them handle it wisely. Right?
Reverse mortgages are inanimate objects, like cars. Cars can’t make people NOT crash into other cars or people. Does that make cars bad? On the other hand, they are great to take people from where they are to where they want to be.
So can a reverse mortgage.
March 27th, 2008 at 6:57 pm
Sorry…one more thought that was in my original “phantom” reply that didn’t post. John, reverse mortgages don’t “provide another way” for people to make bad decisions. They provide money people have earned in their home investment. You seem to assume that anyone who needs or wants a reverse mortgage does so because they’ve made some kind of bad decisions. Maybe they have. Maybe they made good decisions which just backfired. Maybe some kind of life event(s) occurred which was out of their control which took a huge bite out of their savings and/or income. For example, death doesn’t just remove a person from someone’s life. It also takes their income away. That can make it very difficult for the surviving spouse.
Try to look at the bigger picture. It doesn’t matter how or why they are in the situation they’re in. The fact is, here they are. And tapping into their equity may provide them a sufficient financial margin to rise above their difficulties.
Again, if you’re worried that they’ll make poor decisions with their infusion of money, do something for them and help them manage it wisely and responsibly. Don’t doom them to having to live without just because you don’t think they can handle it.
Thanks for hanging in there for the second part!
Have a great day.
March 28th, 2008 at 1:28 am
Wow. Some solid points and information that I never knew. I see the ads for these all the time though and I had my doubt about the product. But I guess like other loan products, the Rev mortgage has it’s good and bad side.
You have some awesome, thorough commentors..