Stacy and I have been seeing a commercial on TV quite a bit lately. It is of “the Fonz” (Henry Winkler) promoting reverse mortgages (see the Youtube video here) and talking about how great they are for seniors who want to enjoy retirement. Well, a friend of ours just so happened to ask what a reverse mortgage is and how it works, so I thought I’d give you a run-down of what a reverse mortgage is, how a reverse mortgage works, and whether or not it is a good idea for you. I know, I know, that means there will probably be some controversy, but I look forward to the healthy (repeat, HEALTHY) debate. So let’s dive in.
First, let’s define what a reverse mortgage is. A reverse mortgage is a loan supported by the Department of Housing and Urban Development (HUD) where a homeowner age 62 and above can borrow against the equity in his/her home. A reverse mortgage is only valid on a primary residence. This loan allows seniors to get a lump-sum amount, monthly payments or as a revolving line of credit. As common sense might tell you based on its name, a reverse mortgage is where the bank pays you money for your house. To keep things simple, we won’t get into the details of how much can be borrowed other than to say you can’t borrow more than the house is worth.
Second, let’s address the question of repayment. It is a loan, so at some point it must be paid back. I know you’re shocked. The current guidelines state that the loan does not need to be paid back until one of the following occurs:
- the homeowner (or survivor if jointly owned) dies
- the home is sold
- the homeowner moves (thus making that property a secondary residence)
- breach of contract (homeowner doesn’t pay taxes or allows home to fall into disrepair, etc.)
That means the biggest concern of whether or not someone will lose their home in a reverse mortgage is resolved. As long as the homeowner is alive and wants to live there, they pretty much can, even if the bank has fully “purchased” their home. One side note that comes up a lot is the issue of nursing homes or other assisted living. There is a provision in the guidelines that allow someone dealing with managed care to maintain the reverse mortgage as long as they live in that primary residence at least one day per year.
I bet you’re already seeing some pros and cons from what you’ve read so far. Let’s consider a scenario. You’re helping care for your mom, who just turned 73. She currently receives $1,100 per month in Social Security and other benefits, but she needs an extra $800 per month in cash to take care of her day-to-day needs. She owns her home completely, currently worth $300,000. Is a reverse mortgage a good idea? I’ll let you chime in (because your answers will start a good debate). Rather than give you my answer, I’ll give you three points to consider:
- When mom dies, either the loan must be paid back or refinanced, or the home must be sold to satisfy the debt. Good thing or bad thing?
- If mom gets used to the extra income and lives long enough that the bank has fully “bought” her house, they’ll stop giving her those $800/month payments. Then what?
- If mom breaks a hip and is placed in a skilled nursing facility, (maybe never able to move home), the reverse mortgage is in great risk as she nears the 1-year mark of being in that facility. What then?
As you can see from the scenario above, a reverse mortgage isn’t necessarily a bad thing. It can provide much-needed cash. It is government-backed. It is common. It doesn’t impact the availability of Social Security, Medicare or many other senior benefits. The Fonz, Fred Thompson and numerous other actors from days gone by think it is a good idea (or at least are getting paid to tell you they think it is a good idea). At the same time, a reverse mortgage isn’t a cure-all. The reverse mortgage industry is rampant with fraud and scams. Even though HUD/FHA requires counseling or a class for anyone entering into a reverse mortgage, many don’t understand what they’re getting into. Your estate could be taking a big hit. The fees associated with this type of loan are generally EXTREMELY high. There is a possibility of getting used to ongoing extra income and then, if you live long enough, it could stop. If you’re on a program such as Medicaid or SSI, reverse mortgage income is considered into your assets, thus possibly disqualifying you for these low-income programs. I could keep going, but I think you’ve got the idea.
A reverse mortgage may be a viable option for someone over the age of 62. Unfortunately, it has become an all-too-popular option when it is often not the best one. You already know I don’t advocate borrowing money and my approach to financial counseling comes straight from Romans 13:8. So am I going to suggest a loan for the senior who needs some extra income? Probably not. Just like anyone else struggling to make ends meet, I’m going to emphasize the importance of doing a budget, cutting expenses, seeking out ways to earn extra income, etc. The major difference (maybe the only one) is that seniors sometimes are less able to work or do other things to earn income and may have necessary expenses that are simply more than the income they can earn (I’m specifically thinking about medication here). In those cases, I’d encourage the senior to contact insurance, Medicare, doctor’s offices, etc. and check into other options before borrowing money. Ultimately, I know a reverse mortgage is right for some seniors who’ve tried just about everything else and still need some income. But BE CAREFUL! It is a huge decision that can have some pretty far-reaching implications.
Do you know someone who has or is considering a reverse mortgage? What are your thoughts? Have you had a good or bad experience with this type of product? What do you think about our scenario?