Like a sleeping giant, the issue of reverse mortgages has been relatively dormant, although I’ve been aware of this type of financial product for years, through television ads that show couples in their sixties cooing about how they can get money in their pockets, travel the world, renovate their homes, and still have some left over for their heirs—but the reverse mortgage always seemed to lurk on the fringes of financial advertising, never the mainstream.
This all changed this summer, when celebrities like Tom Selleck and Harry Winkler appeared on prime time television selling, you’ve got it—reverse mortgages. Really? Tom Selleck, wearing his signature suit and vest, and speaking in the weighty tones of Commissioner Reagan, informing us not about our Miranda rights, but about a financial package? And the Fonz, abandoning his cool for a sales pitch?
So I knew something was up, and it didn’t take me long to realize that this is the year that marketing demographers were waiting on for decades: THE FIRST WAVE OF THE BABY BOOMERS TURNS 70!
Now it made sense. Millions of financial prospects have ripened just as surely as pears in August. Scores of Boomers are trapped in their large, landscaped houses, with no money to go to Florida and live out their dreams. Retired now, with their huge salaries gone, their portfolios stagnant, and the spectre of a Gen X child living in the basement, they are casting about for a way to maintain the standard of living they have enjoyed for decades.
Enter Reverse Mortgages!
Does it sound too good to be true? Anyone with a computer and Google access can type in a few keystrokes and find out that yes, it might be. But don’t take my word for it. Here are some thoughts to chew on, if you are thinking of taking that leap into ‘Reverse Mortgageland’:
Some of the Positives:
-The cash received is not reportable income, so it won’t result in a clawback of your government benefits.
-There’s no repayment required as long as you are in the home.
-You can use the money to renovate, to travel, to invest, to pay bills or help out your family.
-If house prices are going up, the added appreciation might balance off the equity you took out.
-The amount you owe can never exceed the value of your property.
You and your beneficiaries will not be responsible for any shortfall if interest rates increase and housing values drop. (This is true for Canada, and may apply in other countries)
Some of the Negatives:
Financial advisor and writer Garth Turner warns:
–A reverse mortgage is a debt that grows and eats your equity, instead of one you pay off, increasing equity.
–The longer it’s in place the bigger it swells – since interest is steadily accumulating – and the more you will have to repay when you sell the house or die.
–Every month a reverse mortgage is in place, your equity is falling and your debt is rising. So if after a decade or so, if you decide you want to sell and downsize, you might not have enough equity left to buy another residence.
–Reverse mortgages have interest rates significantly higher than conventional ones (almost double in some cases).
Tricia French, writing for Retire Happy, adds:
–Providers market the benefit of using a reverse mortgage to increase savings by shifting wealth from your home to your investments. This form of leverage adds risk.
–Early payment of all or a portion of the amount borrowed could subject you to hefty prepayment penalties.
–Start-up fees typically include an application fee, home appraisal fee, and costs for independent legal advice. Fees can easily reach $2000 to $2500 which is deducted from the principle received.
An American perspective:
Carolyn Rosenblatt, in a 2012 article for Forbes, outlines:
You Might Need A Care Home in the Future
A reverse mortgage, is fine as long as you can live in that home. If you need to move into assisted living or a nursing home, the mortgage becomes due. You will now have the expense of paying it off, which you can do by selling your home. But now you have the mortgage debt, as well as the high cost of the assisted living or nursing home care.
It Can Affect Any Dependent in the Home
If you have non-borrowing family members (which could include a spouse not on the agreement) in your home, the loan is still due. Anyone left in the home must move out, They are “tenants” according the the rules of reverse mortgages and they have to leave when you do.
It Can Go Into Default
If you fail to pay property taxes, keep up insurance on the home, or maintain the home, (and many do) you will be in default. The lender can then foreclose.
When You Die, your Heirs Must Pay Off the Loan
The entire principal, plus accrued interest and service fees must be paid in full to the lender before the heirs can rightfully take possession of the home. If they can’t pay the debt, the lender has the right to foreclose and sell the property.
The Amount the Lender Will Loan is Limited
If you live into your 90′s, there is a risk that the amount loaned will not be enough to sustain you if you need long term care at home.
Rosenblatt, paints a grim picture :
The elder can run out of money to make the loan payments, go into default and end up homeless and impoverished. This is a real risk, particularly for anyone who thinks it’s a dandy idea to take out a reverse mortgage to pay for home care providers. If the elder borrows, say, $200,000, and ends up needing care 24/7, that reverse mortgage cash she got will be exhausted in about two years or less. Then what? Default, foreclosure and Medicaid paid nursing home.
Rosenblatt, like other advisors, suggests that you get advice from a trusted financial planner and law attorney before doing anything.
Be aware, she says, that care at home might cost more than a reverse mortgage could cover, and advises that you look for less costly ways to deal with the need for money. A reverse mortgage, she says, should be considered a last resort.
If you want to learn more, go to these trusted sites:
Would NEVER consider such a thing. I am very glad we sold our 1800 square foot house with acreage, that we spent years renovating, and moved into a 640 square foot house with no bells or whistles, in need of cosmetic repair, with a yard for a garden, and walking distance to food and health care. There are quite a few of us “boomers” who the financial predators don’t find very interesting. I’d love to see a comprehensive statistic analysis of the “boomer” population in terms of pensions and assets, the assumption is that all boomers had big houses, big incomes, big lifestyles… but are those just the ones with a public voice?
Thanks, Maggie. Boomers are, by all accounts, the richest generation ever. I’ve followed up on an abundance of research that attests to this. So it follows that they have large houses and large lifestyles. I’ve done research on this, but will go back and review (maybe another post). You did the right thing by downsizing early, and using your gains wisely. Smart people (like you) would never be in a position to even consider a reverse mortgage! So glad you posted your comment.
I was approached by a mortgage company a few years ago to consider a reverse mortgage on my property as I had retired from service. I gave serious consideration to the proposal and studied all its pros and cons and decided against taking it. I am glad that I did so.
I’m quite sure you made the right choice, Rummuser!
Great comments and solid information about reverse mortgages. They make it look like a good deal for homeowners but they certainly don’t tell you everything.. especially the small print! Good job on the research and the article.
Thanks, Peter. I admit,a reverse mortgage may be okay for some people, those with no heirs probably. But taking that kind of risk with your home doe’s resonate with me!
Wow! Your serious article lays out all the consequences of a reverse mortgage. I had heard from financial planners that this product was a bad idea for most people, but I had no concept of the extent to which heirs could be disadvantaged by it. Thank you for collecting this information and presenting it in a clear, well-organized format. I know a lot of people will be helped by reading this, instead of relying on celebrities to tout something they may not have realized has harmful aspects.
Hi Rin. Those celebrities don’t realize what they are doing when they promote a product. Selleck, for one, has an esteemed reputation—at least his character does! So he may be responsible for some people taking an ill advised financial risk
I’m disappointed in Selleck and Winkler. Especially Selleck trading on his image as a moral character.
Yes, ‘The Commissioner’ has a lot of devoted followers! So he needs to be careful how he exploits that fame. Some people have a hard time separating the actor from the character, however. And they are the folks who fall prey to that sort of advertising. Thanks, Jean.
Very interesting. Here in the UK it’s called equity release, but it’s the same thing, and the same warnings apply. It has an extra appeal here for people who are concerned with inheritance tax, as an estate that is valued at more than £325,000 is subject to 40% tax. But I’ve yet to hear anyone recommend it unreservedly. A case of buyer beware I think.
I know nothing about inheritance tax, Patsy, but that number sounds extreme!
they have this type of financial stuff here in New Zealand – I don’t know how many have used it.
but what is most prevalent here is “retirement villages” where you stump up a lump sum to take up a “licence” – and then you pay some sort of fee per month…most now you have to be over 70 to take them up – even though gov’t retirement age is still 65…
then there are older people who sell up the family home and buy an apartment – not related to retirement villages, but usually the apt block has annual fee for various aspects. Or downsize to a smaller unit (privately)
I am not in any position to do any of this…and will continue to be a renter. Leaving this big private rental in a few weeks time and moving into much smaller and better maintained property – i.e. it’s managed by a real estate rental division so it will be maintained better (read about current entertainment if you want at my blog)
Thanks, Cathy, I’ll do that.
You’ve provided a great service for your readers. As a retired Financial Planner, I cringe every time I see one of those advertisements…even though Tom Selleck is still a handsome devil. Your advice was perfect–what sounds wonderful is not always so. Thank you for your extensive research, and wonderfully written piece.
Thank you, Margie. I am not immune to his charms, either! He plays a convincing character in Commissioner Reagan—doesn’t mean he knows beans about mortgages though!
These reverse mortgage commercials with celebrities — people who don’t really need to earn any money and are doing it at the expense of some of those watching and believing them — have bugged me for a long time.
Me too, Ann! That’s why I wrote this. Hope it helps someone.
In the past, I’ve dismissed ads for reverse mortgages because they, like much of commercial advertising, sounded to good to be true. Now, thanks to you, I have information and resources to support my stance. You have done a service to all who are aging, Diane. Thank you.
I was afraid I would attract the ire of the banking industry, but so far, no complaints! I hope I clarified this issue for some folks. I learned a lot from doing the research!
I saw the movie Hell Or High Water recently. It’s kind of a modern day western. In it, a reverse mortgage situation leads to anger and a lot of violence.
Ill try to see it. Interesting to see a financial product inserted in a script! I can see a RM would generate a lot of anger in heirs, who would see it as being robbed of their birthright!
I’m going to dive into this sea of negativity and talk about a few reverse mortgage positives. I’m 75, a widow, and not connected to the RM industry except as a borrower. I want my children to have anything left over when my estate is settled, but my primary responsibility is not to provide them an inheritance but to maintain my health and not become a burden to them – or the taxpayors. That said, I want to make clear that I do not believe that reverse mortgages are the magic answer to financial problems of Seniors. Like any other financial consideration, an RM may not fit all situations. Most people don’t realize there are different types of reverse mortgages that cover different types of situations. Seniors who own their homes debt free can borrow about 60% of their equity and take the funds as either a lump sum or an annuity (monthly supplements for a set period, usually a bit higher than the 60% because of the present value of cash). Annuities, however, have the downside that when the term is complete, the homeowners have the responsibility of either repaying the loan or turning over the property. Bear in mind that maintenance, insurance, and payment of taxes are required by both forward and reverse mortgages – so if a Senior(s) doesn’t have a sufficient source of funds to pay these basic costs, then an RM might only stave off the inevitable move or sale of their home.
Another type of RM is to purchase a home. This can work well for someone who has sold their primary home in favor or relocating or downsizing. In my case, I was able to use part of the proceeds from sale of my home to fund the 40% necessary equity and got a 60% reverse mortgage on the remainder. Thus, when I decided to move nearer my daughter and downsize, I kept 60% of the proceeds of the sale of my house and was able to buy into a nicer neighborhood that I otherwise would not have had the resources or loan qualifications to purchase. For those who have already made such moves and used part of their proceeds for a down payment and are now again facing payments, an RM would pay off their new mortgage and allow them to remain in the property until they sell, need a care facility or die. Since most Seniors want to age-in-place once they get downsized and settled, an RM can be beneficial.
There are also choices between fixed and variable interest, the same as in forward pay mortgages. This can get complex, but for those of us who are not positive that we are in our “last” home, a variable interest which starts low (under 3%) can be a bargain while we decide. Using a reverse mortgage with a variable rate, I was, in fact, able to reduce the interest on my former conventional loan from 5.5% to 2.75%. It will take about 10 years for the variable rate to average the same as the fixed rate now offered, so I figure that I’ll make some other living arrangements by the time I’m 85.
The market where you live is vitally important in any reverse mortgage decision. An advantage in buying into an upscale neighborhood in a growing city are the increased odds that you or your heirs will get your 40% original investment back because historical inflation will be about the same as interest.
Another misconception is that when the Senior leaves the home or dies that it will be foreclosed. That’s a possibility, but the heirs get up to a year to find a new loan to pay off the 60% that you borrowed plus accrued interest or otherwise pay it off, or to sell and pay off the mortgage – both allowing you or your heirs to keep the property or any excess proceeds of sale. And because PMI (private mortgage insurance) is a requirement of reverse mortgages (and costs 1.5% per year of the remaining debt), if your property is exposed to the prevailing market for a reasonable period and ends up selling for LESS that what is owed, the insurance picks up the balance – so there is no downside to your heirs and possibly an upside.
Another use being promoted for the proceeds of an RM loan is to purchase long-term care insurance. I have Tricare (my husband was retired Navy) and have purchased LT Care which is a no-brainer except for the risk that any insurance company can go broke, cease business, or be driven out of business by government meddling forcing them to insure conditions for which premiums won’t cover expenses. But, if you can get over the risk, LT Care Insurance makes good financial sense. If I get hit by a Mack truck, it won’t have been a good investment – but if I need long-term care, at current rates plus inflation, all the premiums I have paid by the time I’m 85 will be LESS than one year of care at projected rates. I haven’t really thought about whether using an RM to fund Long Term Care Insurance would be beneficial, but it’s something to consider.
Lastly, there are many financial situations in which a reverse mortgage would only stave off an inevitable move or foreclosure. One situation which often induces Seniors to consider an RM is to pay off medical bills – and that is a situation in which I would never recommend an RM. Another situation is the desire to supplement SS with an annuity from an RM – this might serve some, but there are few cases when it is better for someone else to manage funds you could have taken as a lump sum and doled out to yourself – but should the situation outlast the annuity, then the homeowner would have to move. I’m not sure, but I suspect that it is annuities on smaller/older rural homes which suffer the highest foreclosure rate and give RM’s their poor reputation.
Sorry this is so long – it’s a complex subject – but there are benefits to RMs and for the right situation, they can be a valuable financial tool.
Hi Hazel. I’m glad the RM worked for you. Thank you for offering many sides to this complex financial question. This is long, but I’ll leave it up unless it causes problems with my site. I won’t make any comments about the points you raise—readers may choose to answer and continue this discourse. It’s always good to look at all sides of an issue!
I basically concur with your assessment of Reverse Mortgages and long ago concluded the negatives outweighed the positives for me and most homeowners.
As for celebrities and commercials — many many years ago the prevailing attitude among the more well-known celebrities was they would only advertise a product they used and/or believed in — additionally, for many, the language of the ad had to be truthful and not misleading. Better known celebrities considered doing ads beneath their skills and would not do them. They had legitimate concern they would be thought of as endorsing the product, thus reflecting on them personally. Over the years commercialization of everything has escalated, as has the subtle manipulation of language and the development of “truthiness.” Being a spokesperson for a product has become viewed by those who deliver the advertisements as “just a job” — these ads are just one more way professionals in the communication business make a living. It’s all about $$$ — just a business and buyer beware.
Thank, Joared. I tried to present two sides of the argument for and against reverse mortgages, and can tell, from the comments, that most readers are not in favour of them. I did receive a very long comment supporting them, however. If interested, you can go to the comments and read it to see her point of view.
In general, goods and services which are highly hyped on TV by endorsements of famous people are MORE costly than equal products that don’t use high-cost advertising. This is certainly true of the Reverse Mortgages hyped on TV. Like most everything else, it is wise to check out the options before making any big decision. I am about to close my second RM and the hard cost to me was in both cases the cost of the appraisal (less than $500). The RM Lenders who charge application fees and closing costs are the same ones that advertise heavily, but by checking around, I was able to get the fees and most costs waived.
Glad you had some of the expenses waived! It’s true that we end up paying for heavily advertised products. You are more experienced in managing RMs than anyone else I know!
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