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Reverse Mortgages

By Trish Savage, MU Extension Family Financial Education Specialist, NW Region

Reverse Mortgages (RMs) are frequently advertised in the media and many people may wonder what they are all about. The advertisements usually present them as a safe and effective way to get cash to enjoy retirement. This financial tip offers a general introduction and brief discussion on the issues related to RMs.  It also recommends that the consumer researches further to understand the advantages and disadvantages of a RM that apply to their specific financial situation and retirement goals before talking with a lender.

What is a Reverse Mortgage? It is a type of mortgage that allows senior homeowners to access the equity they have in their home and receive cash or a stream of income for their retirement years and still continue to live in their home. There are no on-going monthly payments. Payment of the loan (mortgage) is due when the last listed borrower dies or moves out of the home permanently.

Main Qualifications for taking out a RM:

  • Age 62 or older (youngest borrower)
  • Home involved is their primary residence
  • Borrowers have substantial equity in the home

Typical Costs: (range from $6,000 to $20,000)*

  • Initial Mortgage Insurance Premium (MIP)
  • Origination fee
  • Closing costs – third party fees (appraisal, credit check, title insurance)
  • Monthly servicing fee

*Be sure to find out the Total Annual Loan Cost (TALC) rates and all of the itemized costs.

Types of RMs available:

  • Home Equity Conversion Mortgage (HECM) – most common; insured by the Federal Housing Administration (FHA)
    Options:

    • Payment or payout type:
      1. Monthly stream of payments
      2. Line of credit
      3. Combination of 1 and 2
      4. Lump-sum
    • Interest rates:
      • Fixed (lump-sum only) or
      • Adjustable
    • Special Purpose loan options:
      • HECM for purchase
      • HECM refinance
  • Non- HECM Reverse Mortgages (not insured by the FHA)
    • Single-purpose – these are offered by some state and local governments and non-profit organizations; Sometimes only for low to moderate income borrowers.
    • Proprietary – these are typically designed for borrowers with higher home values

Though RMs may be appropriate for some seniors in some circumstances, there are related issues and concerns. An RM is a complex and costly financial product and most people do not fully understand them.  There are developing trends and changes occurring in both the borrowers and products. Current borrowers are doing so at a younger age, taking more money as lump-sums and using Reverse Mortgages for reasons different from purposes originally designed for helping seniors. The average age of borrowers has declined from the range of seventy-two to seventy four in the 1990’s to sixty two to sixty four in FY2011. What is important about this change is that the value is not the same for younger borrowers because the interest added to the principle has more years to accumulate which causes a declining equity and makes the repayment much higher.  Also, instead of receiving the equity as a stream of income for living expenses or a line of credit to access for home repairs or medical expenses, the growing trend is to take the equity as a lump sum to pay off their mortgage, credit card debt or finance other goals. Per the cfpb report, in FY2011, 73 percent of borrowers took all or almost all of their available funds upfront at closing.

The above issues discussed the first three key findings sited in the Consumer Financial Protection Bureau (cfpb) report to congress, June 2012 which are:

  1. Reverse mortgages are complex products and difficult for consumers to understand.
  2. Reverse mortgage borrowers are using the loans in different ways than in the past, which increase risks to consumers.
  3. Product features, market dynamics, and industry practices also create risks for consumers

The cfpb report also states:

“Misleading advertising remains a problem in the industry and increases risks to consumers and contributes to consumer misperceptions about reverse mortgages, increasing the likelihood of poor consumer decision making…..“Fraud is especially troublesome in the reverse mortgage context given the vulnerability of seniors who borrow. Victims of reverse mortgage fraud are at risk of losing their home and may have few other financial resources”.

“The range of products offered, the structure of the reverse mortgage market, and the consumers who use reverse mortgages have all changed dramatically in recent years. In the past, government investigations and consumer advocacy groups raised significant consumer protection concerns about the business practices of reverse mortgage lenders and other companies in the reverse mortgage industry. The new products in the market and the new ways that consumers are using reverse mortgages today add to the risks facing consumers”.

This is just a brief discussion on the subject of Reverse Mortgages but, hopefully, it raises awareness that seniors should take steps to fully understand the possible benefits, risks and costs associated with this financial product. Alternative financing or solutions for a financial issue should also be checked. References are listed for further information that may help in making a decision about taking out a Reverse mortgage.

Note for resource: The federal Department of Housing and Urban Development (HUD) has housing counselors who are trained and certified to give reliable advice on reverse mortgages and can help compare options. Visit their website: HUD’s counselor search page or call HUD’s housing counselor referral line (1-800-569-4287).

References:

http://www.consumerfinance.gov/askcfpb/224/what-is-a-reverse-mortgage.html
http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf
http://www.consumerfinance.gov/askcfpb/226/are-there-different-types-of-reverse-mortgages.html
http://files.consumerfinance.gov/f/201312_cfpb_foreclosure-avoidance-checklist.pdf
http://fyi.uwex.edu/financialseries/files/2010/10/Brief-10-4-Reverse-Mortgages.pdf