By Zachary Windham
If you watch the news regularly, then chances are that you have seen some notable celebrity pitching the endless advantages of a reverse home mortgage. Actors such as Robert Wagner, Henry Winkler, Tom Selleck, and former U.S. Senator Fred Thompson have all touted the reverse mortgage’s ability to provide a comfortable, steady retirement to older homeowners. These pitches are misleading at best, and fail to address potential pitfalls in detail and make no mention of the various fees associated with the origination process.
Reverse mortgages were initially a last resort loan for older retirees that were concerned about outliving their savings. To qualify, borrowers must be at least 62 years old, own their home outright or carry a mortgage small enough to be paid off by the proceeds of the reverse mortgage. There are no credit or income requirements, and no loans have to be repaid until the owner moves or dies. However, the homeowner is still responsible for paying the annual taxes, property insurance, and maintenance. If the homeowner is unable to pay for these expenses, the reverse mortgage is deemed to be in default and the owner will be in danger of foreclosure.
There is mandatory financial counseling when applying for a reverse mortgage; however, there are concerns regarding the efficacy of this counseling raised by groups such as the Consumer Financial Protection Bureau. Despite this counseling, the Consumer Financial Protection Bureau has reported that borrowers are increasingly using reverse mortgages at younger ages to pay off debt, even before retirement. This only serves to exacerbate the potential issues associated with the reverse mortgage.
Because the entirety of a reverse mortgage loan is paid off when the homeowner leaves the home, the homeowner will owe more over more time. As you acquire more money through the reverse mortgage, interest is added onto the balance owed each month. Because of the compounding interest, the longer a reverse mortgage’s length, the more likely it is to deplete all of the equity from the home.
Although the repayment on a reverse mortgage cannot exceed the appraised value of the home itself, the repayment must be made upon leaving. This means that any heirs will be splitting some portion of their inheritance with the reverse mortgage’s originator. The reverse mortgage loan will also become due if you haven’t lived in the home for a year. This is of significant concern, as it includes entering a long-term care facility. In such a case, you would be required to begin repaying the reverse mortgage at a time when money is presumably already tight.
Importantly, with most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason without penalty. If you are considering a reverse mortgage, please be sure to do your research to make sure that it is a good fit for the financial goals you are trying to accomplish.