There have been many new commercials on TV with trusted actors/spokespeople who are adamant that the Senior Citizen public needs access to the equity in their homes via a Reverse Mortgage. The commercials discuss Peace of Mind, Security, and Quality of Life. What they do not discuss is the downsides to such a program in the short and long terms.
Note: This post is meant for debate as much as for informative purposes and I am sure it will ruffle some feathers... but it is better to ruffle those feathers now before more people choose to go down a path that they were sold on despite the fact that it may not fit their true needs.
There are very pronounced limits to the Reverse Mortgage that are not always outlined in advertisements or even by the Loan Originators that pitch these loans.
I will start with the positives of this loan to show how it can help.
- There is no problem with credit histories. In fact, this is a good program to use in the situation when the homeowner has bad credit as opposed to using a hard money loan.
- Not determined by ability to repay
- The borrower can stay in the property indefinitely.
- This is a negative amortization loan but the borrower will never owe more than fair market value on the property if all the equity is lost to negative amortization.
- Funds can be used in any way
- Manufactured homes do qualify
- Three options to receive funds: Annuity, Line of Credit or Lump Sum.
Here are some of the negatives to ponder:
- HIGH Interest Rates. While the "Interest Rate" itself seems in line, the true accumulation of Negative Amortization is based on the TALC - Total Accumulated Loan Costs. These costs can create an effective interest rate of 9.5% or more. When appreciation in the property is low, the 9.5% negative amortization eats equity at a very fast rate.
- The minimum age for qualifying for a Reverse Mortgage is 62 in the State of Florida.
- At age 62, a borrower can only access roughly 40% of the value of the home.
- The loan to value of this program is calculated based on a determination of approximately how long the borrower will remain in the property... i.e. a mortality calculation
- Once a borrower takes out a Reverse Mortgage, they can never do it again. The Reverse Mortgage cannot be refinanced. If a need for more money arises, there is no way to get additional funds from the mortgage.
- Having more than $2,000 in a savings account for an individual or $3,000 for a couple prohibits the borrowers from qualifying for Medicaid in the event of a medical emergency or catastrophic illness.
- Residency is required. The Reverse Mortgage requires that the borrower stay in the property. An absence of more than 30 days will allow the lender to seek foreclosure.
This is especially important in Florida. This means that snowbirds will have to make the reverse mortgaged home their primary/homestead and stay here full time. This also means that a prolonged stay out of the property - i.e. to help with taking care of a new grandchild, to help in rehabilitation of a loved one, to seek treatment of the borrowers themselves, to travel - are all absences that can trigger default.
- The Negative Amortization of this loan means that the house that Mom and Dad spent so much time and money building and paying off may belong 100% to the bank instead of having any value that can be left to their heirs. In the case that the loan amount is 100% of the value of the property, the heirs still must dispose of the property or refinance it or they or the estate could be liable for the foreclosure.
Now, while AARP and HUD both endorse this program for Seniors, AARP recommends and HUD requires at least two counseling sessions to make sure the borrowers know the positives AND the negatives of this program. Both groups understand the potential damage that this loan program could cause and want to be sure that Seniors receive full disclosure.
My personal and professional opinion is that there are situations where the reverse mortgages do fit. I think that some homeowners have certain goals which can be achieved through a reverse mortgage. I think that it definitely fits a niche market.
That being said, I do not believe it is meant to work for the masses. I believe it truthfully does not fit MOST potential borrowers.
If a borrower has:
- good credit,
- some income by which they can repay a mortgage,
- adequate equity,
- minimal debt,
- controlled expenses,
- affordable lifestyle,
- the need to continue growing wealth during retirement,
- the desire to leave an inheritance to their family/friends,
then I believe that a Conventional Mortgage - a "Forward" mortgage - and proper use of secure, liquid investments can offer the borrower more security and definitely more money over a longer period of time than a Reverse Mortgage.
With a cash out refinance and funding an annuity that can not-only pay or help pay the mortgage payments but can accrue interest to allow the borrowers to have a documented income, a Conventional Mortgage can create a better financial plan for future needs and emergency funds.