If Fred Thompson is pitching reverse mortgages, they must be a safe bet, or at least that’s the impression one gets from watching those TV ads starring the former U.S. senator and actor who played the D.A. on Law and Order.
But reverse mortgages are not so simple.
People 62 years or older may qualify for a reverse mortgage that would allow them to convert part of their home equity into cash while continuing to live there. Rather than make monthly mortgage payments to a lender, a reverse mortgage gives money to the homeowner. The money borrowed doesn’t come due until the reverse mortgage holder dies or decides to sell the home.
Almost all reverse mortgages are federally insured and backed by the U.S. Department of Housing and Urban Development.
“It is a tremendously effective tool” for senior citizens who wish to remain in their own home but don’t have the means to do so, explained Robert Bullock, a local certified elder law attorney.
If a person wants to stay in his or her home but needs money to pay for a home-care worker, taxes or other household costs, a reverse mortgages may be the way to go, said Bullock, who is Jewish.
However, he cautioned, “[a] reverse mortgage is an expensive item for a consumer, and it is something that when the rubber hits the road, no one understands because the paperwork is overwhelming. It’s very complicated.”
Bullock recommended that anyone considering a reverse mortgage hire a knowledgeable attorney.
“To understand the costs pretty much requires a rocket scientist,” he said, jokingly, explaining that because the amount borrowed doesn’t come due until the last person is out of the home, most people don’t realize how much they have borrowed and how much interest they need to pay.
Bullock said he recommends reverse mortgages only to clients “who want to stay in their home but don’t have the resources to do it” rather than seniors who wish to have more spending money.
Similar to problems with many traditional mortgages originated during the recent housing bubble, reverse mortgages have caused problems when the value of borrowers’ homes dipped, resulting in the amount of money owed being greater than the worth of their home, explained Steven Strauss, a reverse mortgage consultant with Security One Lending in Washington, D.C.
The homeowner also remains responsible for the payment of taxes and insurance.
All of a sudden, those holding reverse mortgages found themselves in a hole without enough money to pay their mortgage insurance and taxes and in jeopardy of having their homes foreclosed, said Strauss, who is also Jewish.
The government, therefore, recently tightened the rules on reverse mortgages. The maximum loan amount that can be borrowed was reduced by 10-15 percent, according to the Center for Retirement Research at Boston College.
The new rules limit homeowners from borrowing more than 60 percent of their maximum loan at closing, or during that first year. If a house’s fair market value is $500,000 but it’s appraised at a lower amount, the amount available for borrowing is only $400,000, Bullock explained. A homeowner can then only borrow 60 percent of that $400,000 or $240,000.
Also, under the new rules, lenders must assess a borrower’s ability to pay property taxes and insurance premiums, according to the center. Going forward, borrowers may even be tested to see if they are computer literate to assure they cannot be technologically exploited, Bullock noted.
People who in the past obtained a reverse mortgage “as a last resort when they needed quick cash” do not qualify under the new rules, said Strauss. He is a fan of reverse mortgages if used as designed – for the long term and not a quick cash flow fix.
The Federal Trade Commission points out on its website that the amount of money owed grows over time as interest is tacked on to the loan principal.
The FTC also cautions that reverse mortgages can deplete the equity in a home, leaving a borrower with fewer assets, although they usually include a nonrecourse clause, preventing homeowners or their heirs from owing more than the value of their home when the loan becomes due or is sold. However, if the borrower’s plan is to retain home ownership with a reverse mortgage, the loan must be paid in full, even if the loan balance is greater than the home’s value, according to the FTC.
The government’s message is clear: Be wary of slick sales pitches and do your homework on reverse mortgages before applying for one.