Most people who watch TV have seen commercials touting the benefits of reverse mortgages as a way for seniors to eliminate monthly mortgage payments or pay other bills.
And as more and more baby boomers reach retirement age, reverse mortgages are becoming an increasingly popular option for seniors who need money to live and stay in their homes.
Reverse mortgages are a special type of federally insured loan which allows homeowners who are 62 years and older to borrow against the equity in their homes. Instead of making monthly payments like a traditional mortgage, seniors receive money from lenders to cover monthly mortgage costs and other expenses. The money they receive reduces the amount of equity they have built up in their homes and the loan balance increases over time. Payment on the loan is deferred until they sell the home, move or pass away.
“Consumer awareness is fueled not only by TV advertisement, but also as a result of financial planners and advisers becoming aware of concepts and ideas utilizing a reverse mortgage within a retirement distribution plan,” said Nicholas S. Maningas Sr., a reverse mortgage loan originator at Gateway Mortgage Group, Tulsa, Okla.
Seniors take out reverse mortgages for many reasons such as paying off an existing mortgage or other debt, making repairs to the home, supplementing a fixed retirement income to meet expenses and managing the costs of in-home care. The money from reverse mortgages can be disbursed to borrowers in a lump sum, through a credit line or in a monthly payout.
Most reverse mortgages are federally insured through the Federal Housing Administration’s Home Equity Conversion Mortgage program, under the auspices of the U.S. Department of Housing and Urban Development, and are subject to federal regulations.
Reverse mortgages can benefit homeowners, but they also can carry potential risks. While reverse mortgages require no monthly mortgage payments, seniors still are responsible for paying the property taxes and homeowner’s insurance. A report by the Consumer Financial Protection Bureau found that nearly 10% of reverse mortgage borrowers were at risk of foreclosure because they failed to pay these expenses. Also, in case of death, the heirs are responsible for repaying the loan balance and selling the home.
In the past two years, the FHA implemented several reforms designed to improve its reverse mortgage program and provide additional protection for homeowners, according to a HUD news release. Earlier this year, the FHA unveiled a proposed new rule to reinforce those changes and add new consumer protections for senior borrowers.
The proposed changes were published in the Federal Register in May and attracted 475 public comments. The changes would:
• Require HECM counseling prior to a mortgage being signed;
• Make lenders fully disclose all HECM loan features;
• Include utility payments in the property charge;
• Cap lifetime interest rate increases on HECM Adjustable Rate Mortgages to 5%;
• Require lenders to pay mortgage insurance premiums until the HECM is paid in full, foreclosed on, or a deed-in-lieu is executed rather than until when the mortgage contract is terminated;
• Include utility payments in the property charge assessment; and
• Create a cash-for-keys program to encourage borrowers to complete a deed-in-lieu and gracefully exit the property versus enduring a lengthy foreclosure process.
The proposed changes add new protections for seniors opting for reverse mortgages, consumer advocates said.
“Consumers are generally unaware of the particular nuances of loans and do not know what questions to ask,” said Elizabeth Victoria Noel, an attorney and tax adviser in Maryland and Washington, D.C. “Many borrowers sign and initial documents that they do not understand. However, these closing documents are rife with terminology and penalties that are overlooked by borrowers during the closing. The proposal by HUD to require consumer credit counseling and to make the documents more understandable to consumers is an excellent idea.”
Maningas, however, believes it’s unfair to say borrowers who take out reverse mortgages are unaware of the nuances of these types of loans. He said the FHA and lenders make efforts to educate borrowers about reverse mortgages during interviews and reverse mortgage counseling is required before applications are processed.
“In addition, the borrowers have three days after signing the final loan closing documents to review them, ask questions and if they have changed their mind, rescind/cancel the loan with no penalty,” he said.
While reverse mortgages may not be for everyone, supporters say they can be a valuable financing tool for seniors if properly managed.
“Recent research shows that with a reverse mortgage line of credit, borrowers can better manage the sequence risk of drawing from their investment portfolio in a down market,” said Peter H. Bell, president and CEO of the National Reverse Mortgage Lenders Association, Washington, D.C. “And, because of the credit line’s growth feature, the amount of money a senior can borrow actually grows over time.”
Nearly a million homeowners have used reverse mortgages to age-in-place, “but they do not make sense for everyone and, like any financial product, should be considered carefully,” Bell said.
“Reverse mortgage loans are most successful when borrowers have a plan to ensure the money supports and sustains them for as long as they want to stay in their home,” he said. “New consumer protections were put into place in 2014 to help borrowers preserve more of their home equity during the first year of the loan.”
Bell said reverse mortgage borrowers should never use their loan proceeds to speculate on real estate or securities, or engage in risky investment schemes.
“A homeowner who anticipates moving out of their home in the next few years should not consider a reverse mortgage on their current home,” Bell said. “Reverse mortgage loans are best suited for older adults who plan to age-in-place and live in their home as long as possible. That being said, home buyers who are 62 and older may want to consider a reverse mortgage loan to finance the purchase of their new home.”
Steve Sass, an economist at the Center for Retirement Research at Boston College, agrees reverse mortgages are a good option for many seniors, but are not right for everyone. “The biggest mistake is if you’re going to move, then you have a lot less equity (in your home) than if you had done something else like an equity line of credit,” he said.
To determine if a reverse mortgage is appropriate, homeowners should seek unbiased information and calculators from HUD’s website, contact the State Attorney General’s Office for consumer loan information.
Freelance writer Robin Farmer contributed to the writing and research of this article.