Reverse mortgages: The next disaster?
These loans are complicated and costly. By using them to avoid tough decisions, homeowners are jeopardizing their futures.
This post comes from Marilyn Lewis of MSN Money.
Older homeowners are increasingly jeopardizing their futures by using reverse mortgages in ways for which the loans were not intended, says the Consumer Financial Protection Bureau.
"There is a growing tendency for seniors to obtain the money at a younger age and in a lump sum instead of annual installments designed to spread the dollars through their retirement -- problems that could accelerate as the baby boom generation goes gray," sums up the Los Angeles Times.
The Times adds:
"There may be circumstances where the reverse mortgage is appropriate . . . but the seniors I've talked to really are a bit confused about what it is all about," said Hubert H. "Skip" Humphrey III, head of the bureau's Office of Older Americans. "They're told there's money out there that they can get, but there isn't always a description of the cost associated with the product. And the interest rates and other parts of this product are often confusing."
Reverse mortgages weren't used much until, in the early 2000s, the loans suddenly became popular. Sales peaked in 2009. Now, purchases have leveled out at roughly the volume sold in 2005-2006.
The loans let homeowners who are at least 62 borrow some of the equity built up in their homes. It's easier to qualify than for a home equity line of credit.
You make no monthly payments and don't pay off the loan until you sell the home or die, when everyone living there must leave. If your home sells for less than you owe, you are forgiven the difference. If it sells for more, you or your heirs get the difference.
If you live there long enough after borrowing, it's possible to use up the equity you borrowed and stay by renting -- occasionally for free, making it an extremely good deal. (Post continues below video.)
But that's a gamble. Most borrowers stay only five or six years after getting the reverse mortgage, the CFPB says in its report to Congress (.pdf file).
Meanwhile, you face steep fees. "Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant," says Consumers Union, the nonprofit organization that publishes Consumer Reports.
The Consumer Financial Protection Bureau gives the example of a $166,434 reverse mortgage: After 10 years, the fees and interest could amount to $56,300.
Also, reverse mortgages are complicated and confusing, making borrowers vulnerable to scammers. Many seniors don't even realize that a reverse mortgage is a loan.
Unlike a traditional mortgage, which you pay down monthly, a reverse mortgage balance grows bigger each month. "The rising balance, falling equity nature of reverse mortgages is particularly difficult for consumers to grasp," the bureau says.
The bureau's report draws a picture of financially troubled Americans using reverse mortgages to keep their heads above water in the short term, failing to understand the potentially serious costs and consequences for their old age.
Homeowners are taking reverse mortgages at a younger age -- many in their 60s and some even before retirement. These younger seniors could live many more years and are depleting their equity cushion, leaving nothing for big expenses, like home repairs and medical bills, for which reverse mortgages were intended.
"It was anticipated that most, though not all, borrowers would use their loans to age in place, living in their current homes for the rest of their lives or at least until they needed skilled care," the bureau's report says.
The lump-sum dilemma
Today, most borrowers take their money in a lump sum, rather than as a line of credit or monthly payments.
This creates problems. Stockbrokers, insurance salespeople, financial advisers and others who earn commissions and fees investing and managing money have powerful incentives for encouraging lump sums. But if you don't need all that money immediately, you'll not only incur unnecessary costs, you'll also be stuck with low returns on savings and investments. You could easily end up paying more in interest and fees than you're earning, making the lump-sum option a losing proposition.
"You could face foreclosure if you run out of money to pay property taxes, insurance, or other expenses in the future," the bureau cautions.
Once you take out a reverse mortgage, you must stay put or sell. You can lose the home or the loan (and have to repay it) if you:
- Neglect the maintenance and upkeep.
- Fail to pay the insurance or property taxes.
- Live elsewhere for 12 consecutive months.
- Fail to meet other obligations in your contract.
Solutions for confusion
There are alternatives to reverse mortgages: selling the home, downsizing to a cheaper location, qualifying for a traditional mortgage, or moving in with children or into senior housing.
HUD housing counselors (a fee may be required) can help, although the quality of the advice varies, the bureau says. (Counseling is mandatory before getting a reverse mortgage.) Find a counseling agency here or call (800) 569-4287.
Take the counseling seriously, the bureau advises. Learn all your options. You may be eligible for benefits like Supplemental Security Income, state and local energy assistance programs, or loans that could help you stay in your home. Use the National Council on Aging's BenefitsCheckUp quiz to find programs, eligibility and contact information in your area.
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I suspect the underlying issue behind all these poor investment and financial schemes is that Americans are desperately trying to hold onto a lifestyle they've become accustomed to. The fact that the average middle-class good life is no longer attainable nor sustainable for the majority of them is terrifying. People find all kinds of psychological tricks that allow them to deny painful reality. The average US citizen is absolutely at a loss as to what to do with this new, cold reality staring them in the face. They feel powerless, and they refuse to accept a decreased standard of living and the fact that the future will not be brighter necessarily. Everything they have been told is being proven a sham. Working hard will not necessarily get you ahead anymore, and there is no company loyalty. Employers chuckle at antiquated notions of meaningful seniority. They don't give a rat's **** about your years of dedicated service or valuable "experience." They see you as nothing more than a commodity, and they want your blood, life, and skills for a penny.
Citizens of the US, the good times are over regardless of who is in office. We are owned by the corporations who have no soul or empathy because they are not human. Loyalty is a foreign concept to them, and they don't care about any country. They race to the bottom where the labor is cheapest and they have to give little or nothing back to the community. You will abide their rules like slaves or they will abandon you.
First it was intrerest only loans and outrageous ARMs for people in the process of owning/refinancing a home.Now it's down to seniors who own their home outright.
The swarm of locusts is on the move...
This articles is BS, I saw that Robert Wagner guy ( who let Natille Wood swim in the Pacfic ) say reverse mortgage were a good thing and the Fonz ( Henry Winker) said reverse mortgages were good for old people and people who needed medical treatment. The the Fonz is never wrong!"Aeyyyyyy"
Please say it ain't so, could they be wrong? Its not like they are actors and don't know what they are talking about!
Reverse mortgages are not confusing. It is about personal resposibility. If you borrow $100,000 at 4% you owe $104,000 after year one and so on. You never make a payment so the interest accrues until the house is sold. An Asian 4th grader can understand, but I guess not Americans.
It's going to be that or the street for the still trusting.
*ssh*les.They want us to get better finacially but they do this crap.Just like the home equity loans people got for stupid stuff and their home values are gone now!WTF?
Robert Goode, if I understand you correctly, you are saying that people should lend money interest free. I really like your concept and would be interested in you giving me a $100,000, 30 year loan for free. I will promise to pay you $277.78 per month for the next 360 months.
If they can get Hollywood actors onboard with this, I know it would be great for me too!
I challenge you to find more knowledgeable people in our society.
I see Hollywood actors invited to the White House and speaking in front of the US Senate so there!
What more proof do you need? Hollywood actors know lots and lots of stuff!
The percentage of your house equity that lenders will "reverse mortgage" is amazingly small, often just 25% - 30% of your equity.
Reverse mortgages are a desperation tactic. Be sure you're desperate before taking!
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