What Is A Reverse Mortgage?

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Winchester Mystery MansionI don’t know whether there has suddenly been a push towards more reverse mortgages or if I’m just sensitive to those types of advertisements but there have been a lot more reverse mortgages advertisements lately (can anyone back me on that?). I saw an advertisement today by the Senior Lending Network Program in which Robert Wagner, looking distinguished and in front of an antique car; discusses how a reverse mortgage lets seniors enjoy retirement. In testimonials from actual customers, one woman says that a reverse mortgage gave her the confidence that she would be able to stay in her home – a statement that speaks volumes at how misunderstood reverse mortgages actually are. Before I did the research for this article, I had a very perfunctory understanding of reverse mortgages but knew enough to know that saying that the poor woman’s confidence was misplaced.

What is a reverse mortgage?

A reverse mortgage is exactly what it sounds like, it’s a special type of loan that lets the homeowner convert equity into cash. This differs from a home equity loan in that the borrower doesn’t pay back the loan unless they no longer live there as their primary residence. As long as you live in the home, you don’t have to begin repaying the loan.

The reverse mortgage you want to look for is one that is federally insured by the HUD, US. Department of Housing and Urban Development, and they mandate that only those that are 62+, own (or almost own) their home outright (i.e. no mortgage, or little remaining), and must live in their homes. With respect to ownership, the “almost own” part means that you can pay off the remainder of the mortgage balance with the funds from the reverse mortgage – that’s how close you need to be.

Are reverse mortgages a good deal?

Maybe. If you take out a home equity loan and cannot make the payments, the lender will seize the home. With a reverse mortgage, you don’t have to pay unless you leave your home. You can’t be eligible for a reverse mortgage unless you own your home outright. The reverse mortgage appears to be a safer bet if you’re looking to access cash but don’t want to risk losing your home but that comes at a cost.

First, the interest rates with reverse mortgages are generally not as good as home equity loans. While it’s something you’d expect when you compare the risk a lender is taking on a reverse mortgage, it’s not something that’s always clear when you’re reading the paperwork. Second, the fees involved with reverse mortgages may be pretty hefty as well. Again, the fees may not be spelled out very clearly as well (if you’ve ever seen any mortgage fee breakouts, it can get very confusing) so it pays to be diligent and seek out professional advice.

Heed AARP’s advice

Since this is a program designed for seniors (62+), what better place than AARP to go for advice? They have a whole section on reverse mortgages but the best page I found was a five questions article in which they basically tell you that these things are expensive and you really need to consider them one of many options, a very expensive option.

I don’t think I’m at all qualified to even given an opinion on them as they aren’t targeted towards me, but what I can tell is that the advertisements were very slick. They were definitely showing the finer things in life, how seniors can enjoy the consumerism of their active working income drawing days without the pressures of actually working 40+ hours a week, without at all discussing the two big sticking points about reverse mortgages – interest rate and fees. I think that if you know someone considering this that you should get some professional advice involved before serious mistakes are made.

(Photo by yogi)

{ 21 comments, please add your thoughts now! }

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21 Responses to “What Is A Reverse Mortgage?”

  1. Tom Evans says:

    As marketing director for the Senior Lending Network, and one of the above mentioned “slick” commercial’s creators, I would like to address your concerns. The goal of the Senior Lending Network is not to convince seniors to take a reverse mortgage. Our goal is to educate them on all the ins and outs of the product. When a senior responds to one of our advertisements, we deliver to them a half hour educational video which does discuss those “sticking points” you have mentioned. Furthermore, we offer the senior direct contact to a SLN Certified reverse mortgage professional, who can walk the senior through their specific financial situation, to determine if a reverse mortgage is the best option for that particular client.

    This is not a high pressure sales enivronment – it is a consulatation. Every senior is encouraged to take their time with any decision. Our network will guide the senior through to the independent HUD counseling mandated by the government for the HECM product. The process is designed to educate and protect the senior.

    When I came into this industry, I was skeptical at first myself. Over three years in this position, I have become a full fledged supporter of this product, and have in fact recommended it to my parents and in-laws. I have spoken to literally thousands of seniors who have had their lives changed for the better as a result of our educational program.

    I don’t want every senior to take a reverse mortgage. I want every senior to do themselves the service of finding out all they can about these unique financial tools, and decide if a reverse mortgage is the right option for them.

    Fear is bred by lack of knowledge, and the Senior Lending Network and Mr Wagner work hard to provide education and peace of mind. Thank you for taking the time to read this post, and please feel free to contact me with any further questions.

    Thank you.

    Tom Evans

  2. Also not being an expert at 30 years of age, everything I have read about reverse mortgages tells me they are really for a very few select people in specific circumstances. They are not a product for the masses. This makes me think that the Baby Boomers are going to get drawn into them in droves and then when they figure out they have been had expect the federal gov’t to bail them out. If you are a boomer and are offended by this I am sorry, but I am starting to see a pattern.

  3. I guess this suggests that at least somebody (the lenders) think that the housing bottom has been reached?!

  4. linkedin2046 says:

    Perhaps it’s just me, but a post about Reverse Mortgages alongside a bunch of ads for same on your website seems…tacky. Perhaps they’ve always been there and it’s just my perception. The only reason I mention it is that credibility is important to me as a reader and when posts start chasing the $$, it is just a turn off for me. Anyway, no harm intended, just trying to raise your awareness about one reader’s impression.

  5. plonkee says:

    I’ve always thought a reverse mortgage would be a great idea. I mean, what are you going to do with your house once you’re dead, anyway? Of course I’m a long way from actually needing one – but I should have paid off my own mortgage by the time I’m old enough to qualify and I can look into it more then.

  6. jim says:

    linkedin2046: The ads are contextual, meaning they change based on what is written about. The ads, in theory, will always be similar to what is written in the post and not something under my control.

  7. I don’t like it, but seriously how many people do you know who have a paid for home and no savings? Sigh, and how many more will refuse to move or sell their home?

  8. Mrs. Micah says:

    “I’ve always thought a reverse mortgage would be a great idea. I mean, what are you going to do with your house once you’re dead, anyway? Of course I’m a long way from actually needing one – but I should have paid off my own mortgage by the time I’m old enough to qualify and I can look into it more then.”

    Plonkee, I’d thought about this for my parents, if need be. That is, if my father passed away and my mother couldn’t quite finish the mortgage (they’re close to outright owning, but not quite there). With my mom’s cancer, it might help cover expenses or help her enjoy her last years a bit more… But if she needed to move to a nursing home or something like that for a period of time, she wouldn’t be living in the house and might lose it.

  9. vh says:

    As a leading-edge boomer who (like most members of my cohort) does not need the federal government to bail me out, thank you very much, I happen to have looked in to this issue.

    From what I can tell, a reverse mortgage can be a useful tool if you reach advanced old age and have drawn down your assets to the point where you soon will be dining on cat food or if you have developed a catastrophic illness that will require nursing care and have no long-term care insurance. The advantage is that you can continue to live in your home even after you have extracted the entire value of its equity. The disadvantages are that it can indeed be an expensive option and that if your heirs want to keep the house after you pass, they will inherit the place with a mortgage. They have to repay the lender what you borrowed against the equity. If they choose to sell the house, the lender has a lien in the amount you borrowed.

    If it matters to you whether you can leave a paid-off house to a son or daughter (a valuable asset in these times, when housing is largely out of reach for young people), then a reverse mortgage is not the instrument for you. On the other hand, it may be better to sacrifice home equity than to have to depend on one or more children to support you — that may be a bigger burden for them than the loss of the house.

  10. philip vernot says:

    Holy Cow! I originiate reverse mortgages and I can tell you this. For every 45 people who want more information, only six are even eligible. The other thirty-nine have such a high mortgage or so much debt, they simply don’t qualify. You can’t take it with you and if a reverse provides the senior with a better retirement lifestyle – Good for them!

  11. Mike says:

    The concept of reverse mortgage looks good, but i think getting one reverse mortgage for ourself involve great work since its fees is not clear, interest rate is much high and qualification is said to be complicated. Am i right?

  12. Tim says:

    reverse mortgages suck. the interest is high and you will not get nearly as much as the house is worth. another reason, i’m not for paying of the mortgage early.

  13. Scott says:

    My $.02: Housing market boom caused property taxes to go up and for seniors living on a fixed income this makes it difficult for them to stay in the house they’ve lived in for years and years even if it’s already paid off. A reverse mortgage can help fix this so it’s not necessarily a bad thing. HOWEVER, in my opinion a reverse mortgage is basically like trying to time it so that you spend all of the equity in your home before you pass away – a great idea if you are in need, selfish, and/or hate your kids.

    • a. mccree says:

      Its a great idea now if you plan on giving them their inheritance now and they won’t have to worry about selling the home they never liked. Plus they will see their parents able to enjoy their life now with the elimination of some pressing bills.

  14. Reverse mortgages are never a good idea. Period.

  15. David says:

    I enjoy reading the comments about reverse mortgages never being a good idea, that they suck, that the interest rate is high, the fees are too high, the house could be lost if property taxes aren’t paid, or that the homeowner is selfish by not leaving as much of an inheritance to the kids. These comments actually make my job wonderful, and allows me to sleep well at night knowing that I made a positive difference in someone’s life today.
    I help 10 to 15 families secure a reverse mortgage each month (specifically the FHA insured version). Of those families, on average, 2 would have lost their homes to foreclosure due to high monthly payments, about 6 or 7 need to use the program to supplement their income because of the general rising cost of living, and the rest want the reverse mortgage because they know like I do, for most people, it makes absolutely no sense to keep putting money into your house when you are retired. What good does it do to have a home paid off when you are struggling every month to get by?
    The interest rate is currently 4.5% for the adjustable rate, and 5.75% for the fixed rate reverse mortgage. These are considered high interest rates?
    The “high cost” fees are regulated by the FHA and are completely transparent meaning there are no hidden fees in a reverse mortgage like other mortgages. Put a conventional loan and a reverse mortgage side by side with the fees, interest rates, etc. for ten years, and you would be quite surprised.
    I saw a commercial that said if a homeowner with a reverse mortgage didn’t pay their property taxes, that they could lose the home. NEWS FLASH: if you don’t pay your property taxes with a reverse mortgage, a conventional mortgage, or with no mortgage, you will lose your home.
    The inheritance issue. I would much rather see my mother and father enjoy their retirement years than worry about when they pass how much will be left to me. Their greatest gift to me was life. And, most kids today are doing far better than their parents. Why would you purposely watch your parents struggle?
    OK, that’s enough for this Sunday morning – there really is so much more I could have written. As you can see, I am very passionate about this product because I have seen what it can do for so many people.
    The reverse mortgage isn’t right for everyone. The homeowner must feel comfortable about making the best decision for themselves. Unfortunately, there are a lot of new reverse mortgage professionals out there that don’t ask the right questions, and base their conversations solely on the features, costs, and interest rates with reverse mortgages.

  16. philip vernot says:

    Well said. Thank you.

  17. db says:

    Hah! “The reverse mortgage isn’t for everyone.”

    Why is it that the words “subprime lending” and “bank vultures” are flitting through my head right now? It is seriously a plan to start giving a bank back chunks of an asset you already bought and paid interest on, so that you (well, your estate) can pay it AGAIN and pay interest AGAIN?

    My senior-aged parents and I are in 100% agreement that this is another dubious-at-best investment scheme best left untouched along with $0 down payment/No-interest/40-year mortgages. If push comes to shove I’ll move them in with me before I’ll let them reverse mortgage their home.

  18. Best way to find out if it’s even worth it is to use this Reverse Mortgage Calculator that I found..Easy and fast and gives you the actual amount you could qualify for.

  19. Carrie says:

    It is interesting… if people truly understood that most non-traditional mortgage products only fit a slim portion of the population we wouldn’t be in the trouble we are with the housing market.

    Just like our current crisis, people fall prey (or fall in love with the idea of more $$$) with a product that may get them in trouble, could cost them way more than anticipated or threaten their lifestyle.

    I am sure reverse mortgages are perfect from some— just not all seniors.

  20. RC says:

    I love how all the Reverse Mortgage hucksters have piped up to defend their product. I would too if I made a living pilfering wealth from people whose only smart financial decision was paying off their home. So yeah, its not for everyone. You know what? No doc and liar loans weren’t supposed to be for everyone, either. I totally agree with the poster that thinks the marketing of this product will increase with baby boomers coming on the geriatric scene (gotta love Dennis Hopper hawkin’ retirement plans!)

    Options like RAM’s only pad the pockets of those who really don’t need more. (disclaimer: I believe in a free market, but would rather see them out of business due to lack of support.) If the hippies had truly followed their “free love” ethos from their teens…their children wouldn’t be without an inheritance and charities wouldnt have to beg for money. Free love, man!

    Oh, thats right!!! The boomers decided that the GOVERNMENT should provide for this!! Marvelous! Way to go boomers!

    Its a sad comment on my generation and how the boomers pretty much screwed the next 5 that come behind them with their entitlements and piss poor planning. The proverbial rat is in the snakes belly now, as the first boomers are takin their geritol and readin’ AARP.

    If a paridigm shift is gonna happen, its up to a new “greatest generation” that saves and passes on wealth to their heirs. Instead, we are infatuated with 24″ rims and expensive tats and piercings. Hows that gonna look when we are 85 broke and asking the government for even more money?

    RAM’s (ram it to our seniors) are a bad idea in a world of selfish, bad ideas.

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