Reverse mortgages are complicated financial products and homeowners should not sign on the dotted line without first considering alternatives and the risks associated with the loans.
Along with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley, Consumers Union recently released “Examining Faulty Foundations in Today’s Reverse Mortgages” citing a litany of financial dangers associated with reverse mortgages.
Reverse mortgages are for borrowers 62 or older. The loans offer cash payments or lines of credit tied to home equity. No payments are due until the borrower dies, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes. Under those circumstances, the full balance is due. Borrowers also pay a loan origination fee, closing costs, and compounding interest on the loan principal, which can be significant, according to the study.
The study says there are so many problems reverse mortgages should be considered a home loan of last resort.
“Reverse mortgages carry such high short and long term costs the product should only be considered by those who do not have any other options and never by those with a satisfactory income level and good credit who could otherwise qualify for a traditional (equity) mortgage,” said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
The National Reverse Mortgage Lenders Association’s (NRMLA) own study “The Retirement Abyss: America’s Seniors’ Search for Security,” claims there are far fewer problems with the loans than indicated by the consumer groups’ study.
Advising older home owners on reverse mortgages , consumer groups nevertheless suggest alternatives to the complex loans.
“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,” the consumer study says.
• 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, state property tax postponement programs, in-home supportive services, and veterans pensions to pay for in-home care.
A complete list of reverse mortgage alternatives by state is available from the HECM (for Home Equity Conversion Mortgages) Resources web site.
The HECM Resources site is administered by NeighborWorks America’s NeighborWorks Center for Homeownership Education and Counseling (NCHEC), which promotes long-term homeownership for low-income families. NeighborWorks America is a leader in affordable housing and community development.
• Older home owners should also consider inter-family loans whereby a family member or family members advance money to the senior instead of going to a bank. With a willing family member the senior’s home equity can be used as collateral for the “private reverse mortgage” arrangement. When the home is sold, the investors recoup contributions with interest.
Private reverse mortgages cost a fraction of the lender-originated variety, allow the home owner to stay in the home, family investors have a secure loan that produces interest and, when it’s time to sell the home, the home owner has preserved more of the home’s equity to share with heirs, than he or she would with a lender-originated loan.
Senior home owners should contact an estate planning attorney or a Certified Public Accountant (CPA) to set up the necessary paperwork at a fraction of the cost of a lender-originated reverse mortgage.
For those who do consider a reverse mortgage:
• Attend a sit-down, face-to-face counseling session with a local HUD counselor rather than the phone counseling permitted by law. Right now only North Carolina mandates face-to-face counseling.
• Most reverse mortgages are HECMs administered by the U.S. Department of Housing and Urban Development (HUD), but do not rely solely on HUD counseling to determine if a reverse mortgage is appropriate for you.
Also meet with either a Certified Financial Planner (CFP) or Certified Public Accountant (CPA), and/or with an elder law attorney before signing for any reverse mortgage. A CFP, CPA and attorney can help you examine your personal financial goals and find reverse mortgage products that are best for you.
For those who do sign for a reverse mortgage:
• Stay current on all payments for property taxes, homeowners’ insurance and, when applicable, all homeowner association fees.
• Adequately maintain the home with regular maintenance, repairs and necessary upgrades or the loan could be called.
• A default on the loan could lead to foreclosure.
Yesterday, Part 1: “Reverse Mortgages: The debate heats up.”
See other Reverse Mortgage stories.