Experts discuss pros and cons of a type of mortgage that’s becoming increasingly popular
By Ken Little
A reverse mortgage is one way for retirees and others to use equity in their homes to generate income, improve their standard of living and remain in their houses at the same time.
Those who sell the product to a growing number of customers say reverse mortgages can be the answer to a variety of situations homeowners encounter later in life, not the least of which is impending foreclosure brought on by challenging economic times.
But groups like AARP are not sold on reverse mortgages and say the option should only be considered under very specific conditions.
It’s all up to the circumstances of the individual homeowner, said Wayne Bodow, a Syracuse-based reverse mortgage consultant with MetLife Home Loans, a division of MetLife Bank.
A number of misconceptions persist about reverse mortgages, he added.
“Everybody’s situation is different. For some people, it is an absolutely excellent time to do it,” Bodow said. “You’re utilizing the equity in your home for other objectives, and there are many objectives for doing that. You’re borrowing against the value of your home. You never pay it back in your life, as long as you remain in your home.”
Basically, a reverse mortgage is a loan against home equity that doesn’t have to be repaid until a homeowner moves, sells the property or dies. The homeowner must be age 62 or older to qualify, and can take the proceeds in the form of a monthly check, lump sum payment or in a line of credit.
Rather than a homeowner making payments to a bank like a traditional loan, the bank makes payments to the homeowner. When the borrower moves, sells the house or dies, the loan is repaid with interest.
“It’s really a risk-free option. They’re not jeopardizing their ownership,” Bodow said. “It’s for long-term planning, for living in your home and aging in place. If the person’s intention is to sell the home in a short period of time, it’s probably not a good idea.”
Currently, “There’s a huge flurry of activity going on and at the same time, the economy is really struggling. People might want to take a reverse mortgage now instead of cashing in their investments,” said Lynn Connors, Upstate New York reverse mortgage sales manager for Wells Fargo Home Mortgage. “I always go through all the options available to them,” Connors said. “It’s a great way for seniors to remain independent in their homes and supplement their income.”
Reverse mortgages are highly regulated. New federal guidelines that went into effect earlier this year further define the industry. Negative public perceptions about reverse mortgages came about from earlier actions “by one or two bad apples,” Bedow said.
“There was a lot of bad publicity and people remember the bad publicity,” he said.
In recent months, taking a reverse mortgage saved at least four of Bedow’s clients from foreclosure on their homes. Connors has had similar experiences.
“I’ve saved so many people from foreclosure. We’re not looking for people to repay the loan. The home is the collateral,” Connors said. “We spend hours educating our senior customers. We want to make sure seniors are completely aware of what a reverse mortgage is.”
Bodow said education is vital for anyone considering taking a reverse mortgage.
“It’s like a wonderful solution you should not be afraid of. We need to simply take away the fears that are out there from old myths and take away the fear of this product,” Bodow said. “It’s really such a unique tool and it really can enable a wonderful improvement for yourself and your family.”
The National Council on Aging, a Washington-based non-profit advocacy group, found that senior homeowners could use reverse mortgages to address issues like medical bills, but only 13 percent of elderly homeowners surveyed said they are likely or very likely to opt for the loans.
“For many seniors, their homes are their biggest financial asset. By unlocking their home equity, many more people may be able to afford services and supports they need. Greater use of reverse mortgages can also strengthen community long-term care programs by providing additional resources for financing the housing and service needs of impaired, older homeowners,” organization CEO James Firman said in a published statement.
The issue of protecting home equity is major point of contention with the AARP. Bill Ferris, New York’s AARP legislative representative, said homeowners should not take a reverse mortgage “unless you absolutely have to.”
“They should seek other alternatives,” Ferris said. “It should only be done as a last resort. One of the greatest sources of wealth for a family is their equity and that should be guarded and used very wisely.”
Ferris said AARP has a strong opinion on the issue for several reasons. One of them is the fees attached to taking a reverse mortgage.
“Fees are very high on reverse mortgages. It is a very expensive type of loan,” he said.
Although law forbids attaching other insurance products to a reverse mortgage, “There is still a big-market push when you get a loan to buy an annuity,” Ferris said.
The AARP recommends that a reverse mortgage be taken out only under very specific circumstances.
The first, Ferris said, is avoid foreclosure on your home. The second is when critical repairs, such as a new roof, are needed in order to remain in the house. The third is to pay for health care brought on by an emergency situation.
“I would argue that this is their single largest wealth as an individual and they should only tap into that equity on an emergency basis,” Ferris said.
Another option, he said, is a home equity loan.
“Why pay all these fees?” Ferris said. “People should retain their home equity and use it wisely, not to take a vacation or buy something that’s not a necessity. If they really need the money and they’re in uncertain economic times, they should really consider selling their house and then they have their equity and they will get that lump sum of money.”
Once a homeowner recoups the equity, “They can take that lump sum of money and live very comfortably in an assisted living facility or a senior housing complex,” Ferris said.
The maximum amount that can be borrowed is $417,000. The amount a homeowner can borrow is based primarily on the age of the youngest homeowner, the value of the home, the type of reverse mortgage and the current interest rate. The most popular type of reverse mortgage is the home equity conversion mortgage, known as HECM. The program is offered by the U.S. Department of Housing and Urban Development and is insured by the Federal Housing Administration.
Knowing The Facts
Safeguards are in place to ensure homeowners know the facts before entering into a reverse mortgage, Bedow and Connors said. By law, prospective customers have to seek counseling from a third party before a reverse mortgage is approved.
Consumer Credit Counseling Services is one such non-profit agency that provides free counseling. CCCS has offices in Syracuse, Albany, Binghamton, Utica and Watertown and other satellite locations in Central New York. A certificate certifying a customer received third-party counseling must be issued before a reverse mortgage can be processed.
First, we make sure they have all the information before they sign up for a project like that. We go over all the pros and cons,” said Gary Thurber, assistant director of community relations for CCCS. A counselor and the client discuss the viability of a reverse mortgage, based on personal circumstances. Other family members or friends are encouraged to participate in the session.
“We explain to them the process of a reverse equity mortgage and what the costs are,” Thurber said. “We discuss if that is better or maybe an equity loan is better.”
One concern of many older homeowners is that they won’t be able to leave anything to their children or family members. But in some cases, adult children want parents to take a reverse mortgage.
“We find a lot of times they are misinformed. They are being pressed by younger people in the family to get the money now as sort of an inheritance in advance,” Thurber said. “A lot of people feel guilty they are robbing their heirs of an inheritance or something. Our job is to give them information to make a wise choice.”
Connors said in many cases, adult children have their own homes and financial security and just want what is best for their elderly parents.
“Nine out of 10 kids will throw their hands up and say, “Mom and Dad, we don’t want the house.’ A lot of times, the children are better off than the parents.”
Reverse mortgage insurance must also be purchased to ensure the lender will receive full reimbursement in the event the value of the property decreases, or the mortgage is held over a lengthy period and accrued interest exceeds the value of the home.
Connors said she gives clients the full picture, explaining exactly what the benefits will be. In many cases, she believes, the pros of a reverse mortgage far outweigh the cons.
“It can be a huge piece of mind for clients to have a reverse mortgage and have access to those funds if needs come up,” she said. “That said, I say, ‘Look at what you getting for what you’re paying for.’ Everybody’s situation is unique.”