The lending industry sees reverse mortgages as a bright spot in an otherwise dismal market. It taps a segment of net worth that so often never gets touched. Recently the Federal Housing Administration increased the national ceiling on the equity seniors could withdraw to $625,000. Thus, even in today’s hard-hit housing environment, seniors in higher-priced homes are now eligible and are very attractive customers to lenders.
Lenders are enticing seniors with reduced fees, bigger payouts and looser requirements. Well-informed older Americans may be able to negotiate the pitfalls and find a way to use this complex financial tool, but I seriously doubt most older Americans are that informed.
What is the new reverse mortgage?
Basically, a reverse mortgage releases home equity as a loan to seniors. The loan is repaid when the owner dies, the home is sold or the owner moves, perhaps to a nursing home or assisted living facility. The loan is typically paid from the proceeds of the sale of the house.
Reverse mortgages are being marketed especially to new retirees as a way to fund retirement dreams such as a world-class vacation, a roomy recreational vehicle or a Cabo San Lucas time share.
Lenders like reverse mortgages because the loan is low risk (they get their money back after the homeowner passes away or the home is sold) and up-front fees provide them with an attractive short-term profit.
For borrowers, however, there are pitfalls to avoid. Costs associated with a reverse mortgage — interest, origination fees and points — are more expensive than with traditional mortgages. Homeowners still pay costs such as taxes, insurance and repairs, plus mortgage insurance for the reverse mortgage — insurance that protects the lender. Should the homeowner be unable to pay these expenses, the loan could become due and payable.
Depending on the state, reverse loan proceeds may be counted as an asset and may interfere with Medicaid eligibility, even though untapped home equity is not considered an asset in determining Medicaid eligibility when the owner still occupies the property.
The terms of the reverse mortgage could actually cause the homeowner to be evicted if the owner isn’t there for a specified period — even a prolonged but temporary stay in a nursing-home or other health care facility.
Get More Information About Reverse Mortgages
- Federal Trade Commission
- Several articles from the National Foundation for Credit Counseling
- HUD-Approved Housing Counseling Agencies state search
There are many safer alternatives that seniors should check before turning to a reverse mortgage. For example, if a senior homeowner needs cash for a major home repair, like replacing a heating system, the local power company may offer low-cost financing for that kind of home improvement.
If maintaining the home is getting too difficult, financially or otherwise, seniors may want to consider selling and moving into a smaller home or an assisted living facility.
Older Americans trying to keep a home in the family could sell their home to their kids. The family takes out a mortgage to free up cash for the senior and the house stays in the family. Personally, I really like this option. It makes much more sense for the adult children to help Mom and Dad out this way, and in the end, the adult children also benefit.
Home equity lines of credit may also be less risky. Seniors approaching retirement can also explore options for making the best use of their retirement plans. However, I personally dislike Home equity lines of credit. We have seen what happens when people borrowed against the equity in their homes. The financial melt-down which brought about our current deep recession was in part due to people tapping into their home equity to pay for expensive toys and exotic vacations. Then when the housing market turned south, the borrowers owed more on their homes than they were actually worth.
The upside of reverse mortgages
Reverse mortgages use built-up equity to free up cash for strapped seniors who want to stay in their own homes. The funds are tax-free and many products have no income restrictions. And seniors who have limited incomes may have trouble qualifying for a traditional mortgage.
The payout from a reverse mortgage can be used to pay off a traditional mortgage, finance a home improvement or meet health care expenses.
Depending on the circumstances, a reverse mortgage could be a viable financial strategy. But most experts agree that seniors should explore all options and consult a reverse-mortgage expert — someone not affiliated with the lending institution — before signing on the dotted line. I wish I knew some of these experts. If anyone knows of a reverse-mortgage expert not working at a bank or other lending institution, please let me know.