With a large group of Americans at or nearing retirement age — and with many of them having inadequate savings to last them through retirement — so-called “reverse mortgages,” wherein a lender converts the equity on a home into monthly payments to the homeowner, are being marketed as a financial cure-all to people wondering how they will be able to afford their golden years. But before anyone dives into the reverse mortgage pool, there are some thing worth pointing out.
First off, what’s rarely mentioned in those advertisements that dominate the basic cable airwaves during the daytime is that, because the loan is tied to the equity in one’s home, it is a finite amount; and not necessarily the endless stream of income it’s touted as. Borrowers need to know before they sign anything that this limited amount of money will suffice for supporting them through the remainder of their years.
And even if there is enough equity in the house to sustain the borrower, they still have financial obligations, like property taxes, homeowners’ insurance and any other fees tied to a HOA or condo association.
If the lender decides that the roof is too leaky or there is a termite infestation — or any number of other possible maintenance-related problems — it can call in the loan. And if you default on that loan, you are now opening up the door to foreclosure.
Instead of going the reverse mortgage route, our cohorts at Consumers Union suggest the following alternatives:
Explore eligibility for less expensive programs or benefits
Reverse mortgages are very expensive loans, and as such, they should be considered only as a last resort. Before considering a reverse mortgage, a senior should first determine if he or she qualifies for less expensive programs that offer monetary assistance or cost-cutting benefits. These programs include Supplemental Security Income (SSI), Medicaid, prescription drug discount programs, energy and telephone discount programs, City and County grants and low-cost home improvement loans (sometimes called “single purpose” loans), state property tax postponement programs, In-Home Supportive Services, and Veterans pensions to pay for in-home care.
Seniors should also consider whether an inter-family loan might be better for their situation. In an inter-family loan, a family member or family members advance money to the senior instead of having a bank do the lending. If a senior has family members who are able and willing to consider such an arrangement, the senior’s home equity can be used as collateral for this “private reverse mortgage” arrangement. The forwarded money, with interest, is tracked and recorded. When it comes time to sell the home, the investors are able to regain their contributions along with the interest it earned.
There are several advantages to inter-family loans over the conventional reverse mortgage. First, the costs associated with family investors are typically a fraction of what they would be from an institutional lender. A successful inter-family loan would mean: 1) the senior can stay in the home; 2) the family investors have a secure loan that produces interest, and 3) when it comes time to sell the home, the senior would have preserved more of the home equity to share with the heirs then they otherwise would have if the senior had gone to a bank for the loan. As a practical matter, it is in the ultimate financial interest of the senior and the would-be heirs to preserve the inheritance rather than having the senior’s home being sold in order to pay back an expensive reverse mortgage loan.
The first step in getting started would be for the senior to talk to his or her adult children and discuss how much money the senior requires. If it is a manageable sum for the would-be investors, then a contract can be drawn up to clarify the terms and to protect those investors. Each investor’s contribution would be tracked on a spreadsheet along with the calculated interest. A senior should contact an estate planning attorney or a Certified Public Accountant to set up the necessary paperwork. The setup costs associated with this would be a small fraction compared to the thousands of dollars required to start a reverse mortgage.
If you do decide to try a reverse mortgage Consumers Union recommends you first speak face-to-face with a counselor, rather than the more standard phone chat. In fact, only North Carolina requires face-to-face counseling for reverse mortgages. To find counselors in your area, you can go to https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or contact the AARP Foundation at 1-800-209-8085.
In addition to meeting with the HUD-approved counselor, CU recommends you meet with either a Certified Financial Planner or Certified Public Accountant, and/or with an elder law attorney.
Consumers Union has called upon the Consumer Financial Protection Bureau to enact stricter oversight on the reverse mortgage market.
“Reverse mortgages should only be used as a last resort because they can carry huge costs that can quickly drain a homeowners equity,” said Norma Garcia, senior attorney and manager of Consumers Union’s financial services program. “The reverse mortgage industry insists that it can police itself but it’s clear we need common sense oversight by the CFPB to protect seniors.”