Familiar television spokesmen like Henry Winkler, "The Fonz" from "Happy Days," and Fred Thompson, actor and former Republican senator from Tennessee, were hired to explain to older homeowners that they can access their home equity as a financial resource, but financial experts caution that reverse mortgages are complicated products that are hardly financial elixirs.
As aging baby boomers retire and require additional funds, older homeowners ages 62 and over can consider a reverse mortgage, which converts part of the equity in a home into cash without having to sell the home. The loan is repaid when you die, sell your home or when your home is no longer the main residence. Though all homes are eligible for a reverse mortgage, FHA loan limits cap the amount of loan proceeds on homes valued over $625,500. According to a report by the Consumer Financial Protection Bureau (CFPB) published on June 28. At recent interest rates, borrowers receive between 51 and 77 percent of the appraised home value (or the FHA loan limit, whichever is less) depending on the borrower's age and product choice.
Only 2 to 3 percent of eligible homeowners have a reverse mortgage and about 70,000 new reverse mortgages are originated each yea. But the numbers may grow in the future as a result of the swelling retirement population, according to the CFPB report.
The original purpose of reverse mortgages, which first emerged in the 1960s by private companies, was to help the borrowers meet expenses in retirement. Borrowers could choose an income stream for everyday expenses, a line of credit, or a combination of the two. Today, reverse mortgage borrowers don't choose an income stream or line of credit and instead take the full amount for which they qualify upfront as a lump sum, according to the CFPB's report.
Currently, all but a few reverse mortgages are insured by the Federal Housing Administration as part of its Home Equity Conversion Mortgage (HECM) program, said the CFPB.
Here are seven tips when weighing if a reverse mortgage is right for you:
|Know your lender, or broker.|
Heather Allen, Federal Trade Commission staff attorney in the consumer protection bureau's division of financial practices, said some reverse mortgage marketers use deceptive claims and practices. Brokers and lenders have used names and seals on logos to try to show they are affiliated with the government, rather than just stating that they are an organization offering a loan.
|Look at upfront fees and costs.|
Kevin Starkey, partner with Capstone Investment Financial Group, said reverse mortgage closing costs "can be higher than traditional mortgages."
Reverse mortgage borrowers can eliminate their monthly mortgage or debt payments, but the loan's interest will "chip away" at their remaining home equity over time, cautions the CFPB. Sometimes, borrowers may be saving or investing the lump-sum proceeds, and may be earning less than they are paying in interest
Fortunately, he said, "The reverse mortgage industry has become really good at disclosing fees."
|Understand the risks.|
"Look at the claims being made about reverse mortgages and whether they are broad and unqualified," Allen said. One claim is that consumers can never lose their homes.
"That's not true. There are limitations about that. Consumers will continue to have to pay property taxes and homeowners' insurance and live in the home," she said.
Foreclosure may also occur if the homeowner lives somewhere other than the home longer than allowed by the loan agreement or does not pay insurance premiums, the CFPB report said.
|Reverse mortgages can affect eligibility for government programs.|
A reverse mortgage may affect eligibility for some government programs such as social security insurance and Medicaid, the CFPB report cautions.
|No add-ons needed.|
Many older homeowners may feel pressured to consider a reverse mortgage because they want to stay in their homes and need extra income. Knowing that, brokers or lenders may falsely convince them that they need other financial products in order to obtain the reverse mortgage.
The Federal Trade Commission published tips about reverse mortgages to inform consumers about what to avoid.
"We want consumers to be informed about this product because it can be very complicated," Allen said.
|Inform or involve your adult child, if appropriate.|
The decision for a reverse mortgage can be emotional for the whole family.
Parents want to stay in the house while heirs want to keep their parents comfortable. So the decision about potential nursing home costs, selling and renting a home are factors when considering a reverse mortgage.
Once the reverse mortgage becomes due, heirs or an estate may be financially liable for the loan balance or the balance may be greater than the value of the consumer's home.
|Explore other options.|
Reverse mortgages are not the only option for accessing home equity without selling the home. The CFPB report points out that traditional home equity loans and home equity lines of credit (HELOCs) may provide that also.
"Reverse mortgages generally are easier to qualify for than home equity loans or HELOCs, which require adequate income and credit scores," the report states. "Reverse mortgages do not require monthly mortgage payments and offer several important financial protections, but they have higher costs. Home equity loans and HELOCs have required monthly payments and offer fewer financial protections for the borrower, but they have lower costs."
Sometimes, selling your home and moving into a rental or buying a smaller property may make more sense for older homeowners. Starkey said he discussed with his grandmother the possibility of a reverse mortgage 10 years ago. But after crunching the numbers she decided to sell her apartment and pay rent in a very small community. Though there was a long-term capital gains tax on the asset sold, rent was low in the new community.
"The proceeds from sale more than covered those expenses and there was still a little bit of nest egg for the heirs," Starkey said.