Showing posts with label cons of reverse mortgages.. Show all posts
Showing posts with label cons of reverse mortgages.. Show all posts

Sunday, April 28, 2013

Pros and Cons of Reverse Mortgages for Seniors

Many Baby Boomers have decided that they do not want to move to a retirement community or anyplace else when they retire.  Instead, they plan to age in place. They love their current home and neighborhood, and they have no intention of going anywhere.  For those retirees who have a lot of equity in their homes, most believe that they will have no problem continuing to live in their home.  After all, if home repairs are needed or medical bills pile up, they blithely assume that they can simply get reverse mortgages and tap the equity in their homes.  In some cases, this is a reasonable solution that has made it possible for thousands of seniors to remain in their homes.  However, in far too many situations this complicated type of loan has resulted in the loss of the family home along with all the equity that had been accumulated in it.  Before a homeowner considers this option, borrowers need to understand the advantages and disadvantages.

What are Reverse Mortgages?

Reverse Mortgages are loans that allow homeowners to borrow against the equity they have built up over the years. The homeowners do not make payments on the loan and the loan is not repaid until they either die or move out of the house. 

To qualify, the borrower has to be at least 62 years old.  They must either have paid off the house entirely or have a small enough mortgage that they can pay it off when they take out the reverse mortgage.  This loan is available to any homeowner, regardless of their income or credit rating. 

As mentioned, you do not have to repay the loan or even make payments on it until you either move out or die. However, you are expected to continue paying the annual property taxes and insurance bills on your home, as well as any homeowners' association fees and maintenance expenses.  If you fail to pay for the insurance and taxes, the company that gave you the reverse mortgage can declare you to be in default and foreclose on the home ... forcing you to move out.

Pros of Reverse Mortgages

There are advantages to these loans for some people, and they are certainly one tool that many have used to improve their quality of life as they age.

For example, if someone on a small fixed income is having trouble keeping up with their mortgage payments, a reverse mortgage can eliminate those payments for the rest of their life.  This may make it possible for them to continue to live in the home for years without house payments.

In addition, if someone has other debts such as large medical bills that they cannot afford, a reverse mortgage may enable them to pay off all their debts (including their remaining mortgage) and eliminate the payments.  Again, this can allow them to remain in their home for years and make it easier for them to survive on a small fixed income.

Cons of Reverse Mortgages

Unfortunately, not all the news about reverse mortgages is positive.  According to the April, 2013 edition of the AARP Bulletin, about 58,000 (or one in ten) of these mortgages end up in default.  Here are some of the problems:

People frequently take these mortgages out as soon as they can, often before they are even retired, and use the the money to finance their lifestyle.  If they face a real emergency in the future, they no longer have any equity left in their homes.  If the home requires major maintenance, such as a new roof, they are unable to come up with the money to make the repairs.  The federal government is concerned about these issues.  Skip Humphrey, who runs the Federal Office for Older Americans at the Consumer Financial Protection Bureau, has expressed concern that many borrowers are taking out these loans as soon as they turn 62.  The Bureau feels that these loans are more appropriate for people who are in their 70's or older.  (March, 2013 AARP Bulletin)

In addition to taking the loans out too soon, some people get into trouble with them because they cannot afford to pay the property taxes and insurance.  They may start out using some of the borrowed money to pay these bills during the first few years after they take out the loan.  However, eventually they run out of this cash and cannot borrow more.

There are problems with these loans for married couples, too.  If the older spouse takes out a reverse mortgage while the younger spouse is still too young to qualify, the younger spouse will be kicked out of the home when the older spouse dies.  This can be a serious problem for the younger spouse who risks losing their home and all the equity in it at the very time when they are also distraught  over the loss of their spouse.  Frequently, the home is only real asset the couple may own, and the result can be that the surviving spouse is left destitute.

Finally, many people do not realize that the up-front fees on reverse mortgages can be $10,000 or more, and these fees are financed as part of the loan.  

Proposed Changes to Reverse Mortgages

The AARP Foundation and some other organizations have filed suit to force changes in the ways that these mortgages are handled.  The Department of Housing and Urban Development (HUD) has also begun to make some reforms to these loans.  Among the proposed changes are:

Protecting surviving spouses;
Getting stricter about deceptive advertising;
Requiring a financial assessment before these loans are approved;
Requiring set-asides to cover future expenses such as taxes and insurance for a number of years.

Hopefully, the benefits of these loans will be preserved while some of the disadvantages will be minimized.

If you are interested in learning more about how to get the most out of your retirement planning, look through the five index articles listed below.  Each one contains links to nearly all the articles that have been written for this blog.

Gifts, Travel and Family Relationships

Great Places for Boomers to Retire Overseas

Great Places to Retire in the United States

Health and Medical Topics for Baby Boomers

Money and Financial Planning for Retirement

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