You see them on TV — the parade of “B” actors talking in smooth, reassuring tones about how great a reverse mortgage can be. If it’s such a great deal, then why do they need Robert Wagner to sell you on it?
While a reverse mortgage can be a lifeline for some, according to the AARP nearly 1 in 10 are in default. And these loan instruments, which are insured by the Federal Housing Administration, are going to be a $2.8 billion dollar liability to the government over the next 30 years. It’s not just a problem for seniors, it’s a problem for all of us.
Strip away the has-been celebrity endorsements and fancy terminology, and reverse mortgages are just another way to borrow against the equity of your home — and have many of the disadvantages of any home equity loan.
The fees on most types of reverse mortgage tend to be higher, including the interest rates, closing costs, and service fees. Those fees can take a significant bite up front, and continue bleeding money for years down the road. Especially for privately issued reverse mortgages, it’s important to shop competitively and compare the deals you’re getting. The unfortunate reality is that most seniors are turning to reverse mortgages out of desperate financial need, and may not be in a position where they can do a lot of comparison shopping.
Once you sign on the dotted line for a reverse mortgage, you’ll find many of the limitations of a standard mortgage come along with it, like escrow for taxes and insurance. Many homeowners in our area have allowed their property insurance to lapse, in protest of our state’s self-managed insurance pool significantly raising rates on policies in an effort to move properties to private insurance companies. For many down here it’s just not worth it. If you have a reverse mortgage and suddenly get hit with a big increase on your home insurance policy, you’re stuck paying the tab whether you can afford it or not. The mortgage servicer can, in some cases, dictate the amount of coverage you have to carry, further inflating the bill.
Think About One Income
Couples enter into reverse mortgages without always considering what would happen if one or the other suddenly passed away. On many reverse mortgages, it’s not unusual for the older of the pair to be the only name on the mortgage, if the younger spouse is too young to qualify. If the older spouse dies, the surviving family member can lose the house if he or she is unable to repay the entire balance of the loan. Failure to pay can mean ending up in foreclosure, and losing your home at the very point in life you need it the most — leaving your widow trying to figure out where to live on her $800 Social Security check.
Leaves Nothing For The Heirs
Frequently the sale of a home is how the surviving family pays off the debts of the estate and manages the funeral expenses. With a reverse mortgage, the loan balance has to be satisfied first, and the family gets what’s left. If the property has been in the family for a long time, this can leave the heirs in a difficult situation. There is no way to pass the property on to the next generation without coming up with a large lump sum of cash, in addition to the usual estate taxes and property transfer fees.
Changes Are Coming
The US Department of Housing & Urban Development and the Consumer Financial Protection Bureau are teaming up to end the more abusive practices in the reverse mortgage industry. HUD and the FHA will most certainly move to make reverse mortgages more difficult to obtain, and limit the option to take a lump sum disbursement. The majority of reverse mortgage applicants today choose the lump sum option, so that change alone will remove the incentive for millions of applicants.
One thing is for sure and that’s the next wave of retirees, people who spent their entire working life believing they could rely on Social Security and Medicare to take care of them in their old age, are going to continue to struggle with longer lives and fixed income benefits. Sometime during their working lives the political winds changed, and the promises they once counted on don’t look so solid these days.