More seniors turn to risky reverse mortgages
These mortgages regain popularity despite concerns that many baby boomers are using them to drain their home equity too early, leaving them nothing to fall back on.
This post comes from Marilyn Lewis at partner site Money Talks News.
Reverse mortgages are growing in popularity now that the big baby boom generation is entering its silver years.
A reverse mortgage is a type of loan that lets you borrow some of your home's equity. The twist is, no payments are required until the last surviving borrower dies or sells.
Boomers in financial distress
The new surge in equity borrowing is partly a legacy from the recession, which wounded the boomer generation financially. But even before then, boomers (and nearly half of all American workers) were short on retirement savings.
Reverse mortgage borrowing grew by 20 percent between 2012 and 2013, Reuters says, adding:
Many retirees haven’t saved enough to cover expenses for the rest of their lives. But many of them have one major asset -- a home.
The oldest boomers turn 68 this year. The concern is that many are using reverse mortgages to drain their home equity too early, leaving them nothing to fall back on in 15 or 20 years. In a 2012 report to Congress (.pdf file) in 2012, the Consumer Financial Protection Bureau said younger borrowers are increasingly using reverse mortgages to pay off debt, even before retiring.
You must be at least 62
To qualify for a reverse mortgage you must be at least 62 and have paid off your mortgage or have substantial equity in your home. Depending on the loan type, loan proceeds can be received as cash, a line of credit, or monthly payments.
The amount you can borrow depends on your age, your equity, the type of reverse mortgage and the interest rate on the loan. In the best case, homeowners can stay on for decades, enjoying the money with no need to repay until they die or sell.
Here are resources for learning more:
- In this video and article, Money Talks News founder Stacy Johnson explains how reverse mortgages work.
- The Consumer Financial Protection Bureau explains eligibility.
- AARP lays out the pros and cons.
- The Federal Trade Commission has a detailed explanation.
- ElderLaw explains the risks.
Lifeline or risk?
Reverse mortgages are particularly complicated loans. They're not good for everyone, and so a borrower's entire financial picture needs to be considered. A reverse mortgage taken in desperation can even make things worse, certified financial planner Sean Keating told CNBC:
"When an older couple cannot afford to live in the home anymore, getting a reverse mortgage will only delay the loss of the house and will leave them with no assets," he said.
Better to sell the house and downsize, move in with a family member, take on a roommate or explore whether one of your adult children might be willing to purchase the family house through an installment sale, Keating added.
Because of the risks, the federal government (which funds most of these loans) requires borrowers to get financial counseling first, so they know their options and understand what's involved.
Among other risks:
Fees on reverse mortgages often are steeper than on conventional mortgages. There are closing costs, an origination fee, mortgage insurance premiums (on some federally insured loans) and other fees. Reuters says:
The margins on selling these loans can be three to five times the margins on regular mortgages, said Don Currie, president of lender High Tech Lending. Banks can also collect fees for performing tasks like sending out account statements to borrowers.
Falling behind on taxes and upkeep
Even though you don't need to make payments, with a reverse mortgage you still own the home. Your name is on the deed. That means you have to pay taxes and insurance and maintain the property. If you fall behind on these, you could lose the home.
High interest rates
Interest rates are higher on reverse mortgages than on 30-year fixed-rate mortgages. The average rate on conventional mortgages is 4.4 percent now. But you could pay a bit over 5 percent on a reverse mortgage, Reuters says. Over time, even that seemingly small difference adds up.
Your kids may lose their inheritance
When a borrower dies, the lender takes its share of the proceeds to cover the loan, interest and fees. What remains, if anything, goes to heirs. But the kids may be left with nothing. If you hope to leave your home to your heirs, a reverse mortgage could put that plan at risk.
Also, The New York Times reports, some heirs who want to pay off their deceased parents' reverse mortgages aren't getting the chance to do so.
The Times writes:
Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages.
Other family members have run into bureaucratic walls trying to get lenders to tell them how to keep their family homes, the Times says.
Upon their husband's death, some widows have been devastated to learn that their names were not on the reverse mortgage, according to the Times.
"If both spouses are not on the reverse mortgage deed and the spouse who is on the deed dies first, the surviving spouse would be required to repay the mortgage loan in full or face eviction," says ElderLaw.
"If you are not facing a financial emergency now, then consider postponing a reverse mortgage," says AARP. Here are some alternatives:
Home equity line of credit or home equity loan. Fees and interest rates are likely to be lower with these loans.
- A line of credit lets you draw chunks of money up to your approved limit, charging interest only on the amount withdrawn.
- With a home equity loan, you are given the money all in one chunk and you start paying interest on the entire amount immediately.
Ask yourself before getting one of these loans: Can I afford to make the monthly loan payment?
Sell your home. Selling puts the entire amount of your home equity into your pocket (minus the costs of selling). The question here is, do you have enough equity in the home to make selling worthwhile?
Low-cost senior loans. You may qualify for one of the low-cost housing rehabilitation grants and low-interest loans. The money can be used to correct a home's safety or health problems or make it handicap-accessible. These federal loans are administered by states' aging services divisions. Find your state's agency at the bottom of this page.
More on Money Talks News:
Anyone who's dumb enough to ask for a reverse mortgage deserves the out come. Like P.T. Barnum always said "there's a sucker born every minute". A reverse mortgage is a scam designed to get a lien on your home equity. People rarely receive more than a small percentage of their actual equity in a cash pay out. With a reverse mortgage you won't make any more payments but the interest will accrue and compound, along with high loan fees, and monthly mortgage insurance premiums until the lender has gotten all your remaining equity. The lender will require you to maintain the property in a sell ready condition and pay all costs related to keeping it that way. They may even require you to get flood or some other additional insurance policy and keep it for as long as they have the loan.
If you need the cash from your home, sell it. Now you'll get ALL your money and most if not all will be tax free, then rent. A reverse mortgage is really nothing more than legalized theft. Many who have taken one of these loans realize they made a huge mistake and sell before the bank could get everything. Lenders use the no mortgage payment line as a hook to get into the biggest, and in many cases, only real asset an old retired person owns. You may not be writing a check but you'll still be making a monthly payment and guaranteed for far more then you were paying before the reverse mortgage..
The "GOVERNMENT" is the main problem. Put any subtitle, division call it whatever you like "IT" is the problem. Totally screw up everything they frickin touch and expect the AMERICAN working class to fix it or fund it.
There is nothing filthy ,low down or sorry enough to explain how much I despise the sorry ****es...........................GO FIGURE!!!!
Have a great weekend!!!!
Dumb Dave 1230,
Hey jerk, if you think the bank is going to give you a chunk of cash from a reverse mortgage, your a bigger fool than even I think you are. Most old folks have a lot of equity in their homes and banks know it. The hook is a no monthly payment sales pitch. Most rarely get more than a few thousand dollars up front from a reverse mortgage, especially if you have an existing mortgage, as nearly all do or why get these loans. The home owner will get buried in loan costs in the first couple years These loans are designed to get a lien on your home equity that allows the interest to accure and compound for years until the bank has it all. You still pay the property taxes and now mortgage insurance. In many cases the bank will require additional insurance policies like flood or earthquake and mandate you keep your home in a marketable condition, which is determined by them, or they can call the loan. ALL of which YOU pay for. These loans exist because lenders love a high profit sure thing and there are plenty of moron borrowers like you who ask to get fleeced. If you need the cash from your home, your are far better off selling, getting your money tax free and renting. You'll have control of how much money is spent. No matter if you write a check or not you are still paying each month. With a reverse mortgage that amount grows every month, you just don't see by how much and your better off not knowing.
Interesting your children may lose their inheritance. How much of their inheritance do they lose from the Social Security payments that you have made and do not collect and are unable to give to them in a will?
Financial planning, including retirment planning, is an individual responsibility not a government responsiblity and the government should be removed from this redistribution of wealth program.
The good news is lenders will make another windfall off risky mortgages, deadbeats will get homes they want (at least this week) but have no business buying, and the President can claim home ownership is available to everyone. The bad news is when these borrowers don't pay and claim they were tricked by the banks AGAIN, the rest of us will get stiffed with another new round of foreclosure bills. That's even before the last lending disaster has been cleared from the books.
It's obvious nobody gives a sh..t about the middle class tax payer. It's getting really old. First footing the bill so millions of deadbeat freeloaders can get free medical insurance, while mine doubled in cost, now were back to paying for another round of walkaway deadbeat home loans. Who looks out for the guy who works his a$$ off, pays his bills and doesn't take handouts?
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