Reverse Mortgages: A Great Deal for Seniors or Just False Hopes

Jan 17, 2011
Harriet Tramer

Picture of money received through a reverse mortgage - venturebeat.com

Reverse mortgages allow you to get money from the equity in your home. And that can prove very helpful for seniors. But are they really a great deal?

These days increasingly more seniors want to age at home. But good intentions are one thing and being able to maintain your lifestyle when medical bills and other expenses are nibbling away at your income is something else altogether. So, how do you make this arrangement affordable?

Well, a reverse mortgage whereby you receive payments forthcoming from the equity in your home, with these loans not coming due until you die or sell your home, might be one possibility. But are these financial instruments a wise choice in these rough economic times?

Reverse mortgages do have some decided advantages, including:

1. You can opt to receive your payments through various arrangements, so they remain responsive to any financial emergencies that might arise. Available options include: a lump sum, periodic installments or a line of credit which allows you to withdraw money when you need it much as you would with a home equity credit line.

An April 16, 2010 New York Times article by Tara Siegel Bernard, “Reverse Mortgages Still Costly but Less So,” explains that: The lump sum products are most likely to have fixed rates, while credit lines generally carry adjustable rates. Borrowers can also combine options and change them at any time for a nominal fee.

2. Reverse mortgages can serve as a “last resort” if your stocks and other assets have been depleted or if, as is happening to increasingly more seniors, your 401-K plan has not held its value.

3. Reverse mortgages can pave the way for your getting money out of your house within a short time span, avoiding the frustrations of having it sit on the market literally for years, a November 7, 2010 Associated Press article “Changes make reverse mortgages cheaper,” notes.

Reverse Mortgages Might be Less Costly but the Costs Can Still Add Up

Another consideration: The Federal Housing Administration, which does not make reverse mortgage loans but insures lending institutions against losses is making them more affordable. This agency now offers a lower cost reverse mortgage called the HECM (Home Equity Conversion Mortgages) Saver that provides smaller loans but also significantly reduces upfront fees, a November 7, 2010 Associated Press article “ Changes make reverse mortgages cheaper, shorter ” notes.

This new option might help people who want to get money out their original mortgage and use these funds to downsize their housing. This arrangement could allow them to continue aging at home, even if it is not the place they had long called “home,” according to a December 21, 2008 ReverseMortgageDaily.com article “More Press Coverage About HECM For Purchase Program.”

However, even with these adjustments, reverse mortgages are still costly, the New York Times article notes. A lender can charge an origination fee of 2 percent of the first $200,000 of your home’s value, plus another 1 percent for any amount over that. The total is, however, limited to $6,000. Borrowers must also pay an upfront mortgage insurance premium of 2 percent of the home’s value and a monthly insurance premium equal to 0.5 percent of the mortgage balance, according to this article.

Your Comparative Youth Might Work Against You and Other Considerations

If you are about 62 and like many other aging baby boomers finding yourself short of cash, possibly after losing your job, a reverse mortgage might offer you less than you would expect. These loans represent one instance in which older is better.

You can begin qualifying for a reverse mortgage if you are only 62 but the amount for which you will qualify is diminished. For example, if you own a $350,000 home outright you would only be able to withdraw about $184,000, the New York Times article notes. The comparable figure for 72-year-old would be about $211,000. A comparison: You can begin collecting Social Security at 62 but you will receive lower (prorated) monthly benefits for as long as you collect them.

And there is always the possibility that fraud might be involved in a reverse mortgage transaction. A March, 2008 CFB Newsletter article “Reverse Mortgages a Tool To Use With Caution,” quotes Kevin R. Keller, CEO of that organization’s board as warning “some seniors have been bilked by investment salespeople who pressure them to take out a reverse mortgage and use the cash to buy investments that generate high commissions for the salespeople.”

Still another thing to consider: A reverse mortgage might help you if you have considerable equity in your home, having paid off the mortgage in full or having nearly crossed this threshold. But in our present economic climate literally millions of people have refinanced, taken out second mortgages and otherwise depleted their home equity.

So, they clearly are not positioned to benefit from a reverse mortgage. These loans might have some decided advantages but being able to make money in the form of home equity when it is not there is clearly not one of them.

The Number of Applications for Reverse Mortgages is Growing

None of these caveats, however, seem to be steering homeowners away from reverse mortgages. Rather, as a July 22, 2010 reversemortgagedaily.com article “Number of Reverse Mortgage Applications Up 8.8% says FHA,” makes clear increasingly more people are showing an interest in them. This article notes that June, 2010 marked the fifth consecutive month that the number of applications rose.

And it also indicates that as the number of homeowners filling out these forms climbed, so did the number of reverse mortgages that were eventually issued. The Federal Housing Administration announced that it approved 5,034 such mortgages during June, up 16.5% from May.