Truth, myths about reverse mortgages
Reverse mortgages are such an unfamiliar, peculiar idea that perhaps we should have expected all the dopey stories that have sprung up about them.
Among them:
1. Homeowners will lose their houses. Greedy bankers will become the new owners.
Truth: Homeowners will continue owning their houses.
2. Grandma and grandpa will get kicked out into the street.
Truth: Homeowners can remain in their houses so long as they do the usual: pay their taxes and home insurance and keep up the place.
3. The lenders may abscond not only with the old homestead but with everything else the homeowners possessed.
Truth: A reverse mortgage is a “nonrecourse” loan. If the lender doesn’t get his loan back, with interest, from the sale of the house, that’s the lender’s problem. The borrower’s other assets are untouchable.
Reverse mortgage have been getting a ton of attention lately because (a) house prices have soared to the skies and (b) many older people, along with baby boomers, have saved only a pittance for their retirements.
But, if you own an expensive house, how can you get money out of it — and still live there?
You can’t just sell your attic or downstairs bathroom.
One answer is a reverse mortgage, where you take out a loan against your house.
But instead of paying the lender, as you would do with a normal “forward” mortgage, the lender pays you. As the saying goes, typically a reverse mortgage is for people who are house-rich and cash-poor.
The most popular kind of reverse mortgage by far is the Department of Housing and Urban Development’s Home Equity Conversion Mortgage. Homeowners age 62 or older can choose (a) a line of credit, (b) a lump sum or (c) a monthly income for as long as they live in the house. Or a combination.
(The line of credit is the most popular — probably because homeowners don’t owe any interest until they take money out.) The income is not taxed: It’s just a loan.
By and large, the loan comes due when the borrowers move, sell the house or die.
I’ve interviewed a score of people who have taken out reverse mortgages, and the word I keep hearing, over and over, is: godsend.
Without the extra cash, these senior citizens would not have been able to pay their medical bills or pay for house repairs — or simply live a fairly comfortable existence.
But, as Thomas Scabareti, a reverse-mortgage authority in Califonia, told me, “They are wonderful for some people but no panacea.”
One of the biggest dangers in a reverse mortgage is that, after a year or two, the borrowers may leave their house for 12 consecutive months — perhaps to enter a nursing home.
Their loan will become due, and they will have paid a lot for what turned out to be a short-term loan.
That’s because the closing costs on reverse mortgages can be high –as high as $15,000 in expensive areas, such as New Jersey.
A retired banker in this area, Jennie, recently applied for a reverse mortgage, then turned it down. The closing costs were $13,000. “Outrageous!” was her response. “I could live for a long time on $13,000!”
No one denies it.
“No one ever said these loans were cheap,” says Sarah Hulbert, senior vice president of Reverse Mortgage of America, a division of Seattle Mortgage. “But it is often a sensible choice for seniors who want to remain in their homes.”
Jeff Taylor, senior products manager of Wells Fargo, another leader in the reverse-mortgage business, points out that there are unusual risks to the lender.
“This is not like other mortgages,” he argues. “It lets you borrow money and still live in your house all your life. No other mortgage offers such a guarantee.”
Then there’s the fact that the HECM mortgage limits the amount you can borrow, depending on house prices in the area where you live. (The average loan is for about $180,000.)
But Financial Freedom in Irvine, Calif., makes reverse mortgages for unlimited amounts although the expenses are higher than with a HECM or with Fannie Mae’s entry into the field, the Home Keeper.
Yes, well-to-do people sometimes get reverse mortgages –and why not? Why sell your stocks and pay all those capital gains taxes?
Bill Wagar of Livonia, Mich., took out a reverse mortgage to pay for a two-month trip that he and his wife took around the world.
Still another danger: Older folks are the main target of crooks and unprincipled salespeople and those low-lives must be licking their chops at the prospect of many older people getting access to a lot of money. Boy, can they sell a lot of deferred variable annuities!
As it is, some older people use their reverse mortgages not too wisely.
One reverse mortgage consultant tells of a man in his 80s who used some of his new-found money to buy a Ferrari. Why?
His innocent explanation: His 50-year-old girlfriend said he looked good in the driver’s seat.
Fortunately, such silliness does not happen often. One reason: All reverse mortgages require borrowers to get a free, impartial counseling session before they can apply.
No, reverse mortgages are not a panacea. But despite the possible problems, they are clearly an idea whose time has come.
Source: Warren Boroson writes about money matters Wednesdays, Fridays and Sundays. He can be reached at (973) 428-6647 or wboroson@gannett.com. He will talk about investing to local organizations at no charge.
