One of the growing trends among seniors in today’s tough economy is the rising turn towards reverse mortgages. What is a reverse mortgage? Well, it’s a financial resource that gives seniors the opportunity to use the equity in their home without any income or credit qualifications. Most seniors qualify – they must be at least 62 years of age, live in their residence and have equity in it.
Critics of the program say up-front costs are way too high, seniors are forced to pay obscene amounts of interest and the terms of agreement are too complicated for the average senior to understand. Proponents argue, meanwhile, that it gives seniors much-needed income and since the housing collapse in 2006 financial institutions work closely with retired homeowners.
With Baby Boomers, seniors and retirees not having sufficient savings, investments and other retirement income means, reverse mortgages depict themselves as being the only option available for struggling elders – one promotional aspect of reverse mortgages is that no payments are required to be made on the loan until the borrower passes away or exits the residence, which could be decades.
However, the fine detail dictates that borrowers must pay their property taxes, keep up to date in homeowners’ insurance and remain in good standing with any other homeowner’s association dues and assessments. If the borrower should fail to live up to these obligations then the loan could enter into default and the bank would foreclose.
Other charges consist of a monthly $35 service fee for the life of the loan as well as $1,000 closing costs. Reverse mortgages could also become packaged into government-guaranteed bonds that can appear to be more attractive to homeowners.
“Reverse mortgages are a useful tool for some people,” said Lori Trawinski, senior strategic policy adviser with the AARP Public Policy Institute, in an interview with NBC News. “They can enable retirees to age in place, but we always emphasize that these are loans, and as such, borrowers have obligations.”
Inside Mortgage Finance published a study earlier this month that discovered borrowers took out more than $15.3 billion in reverse mortgages, a 20 percent increase from 2012. At the height of the economic collapse, housing bust and Great Recession in 2009, a record $30-plus billion was taken out.
Approximately 77 million Baby Boomers are on the verge of retiring and with only 18 percent of older workers confident in their ability to retire; many industry professionals expect reverse mortgages to become even more popular than they already are.
Although financial institutions are providing the loans, the report suggests that the major banks in the United States today, such as Wells Fargo and the Bank of America, aren’t particularly pleased with reverse mortgages. The Federal Housing Administration (FHA) has even commented that it would like to see things change in regards to reverse mortgages, though it hasn’t revised any of the program’s rules.
“As with any mortgage product, there is risk to financing a loan, but we have made, and continue to make, significant efforts to mitigate that risk,” Melanie Roussell, a spokeswoman for U.S. Department of Housing and Urban Development, told Reuters.
Analysts do make the case that reverse mortgages make up a very small percentage of the entire $9.4 trillion mortgage market so the finance sector can cope.
Furthermore, the FHA could act soon because reverse mortgages are costing the federal department money. During the time period of the loan, the interest adds up, which is roughly five percent, and eventually the home’s value may not actually be worth enough to cover the debt. This leads to losses for the FHA.
In the end, a reverse mortgage could prove more harm than offering any benefits for seniors. Consider these dire words from Sean Keating, a certified financial planner and principal and founder at Patriot Financial Advisors, who 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.”
Instead of relying on the equity in their home, finance and real estate experts suggest for seniors to downsize their lifestyle, move in with a family member, co-share the home to split the expenses or to add a roommate.
