Reverse mortgages are loans that provide supplemental income to seniors 62 and older based on the value of their homes. A reverse mortgage does not need to be repaid until the homeowner sells the property, moves or passes away.
But the loans that were intended to help retired homeowners maintain their lifestyle in their current homes are beginning to cast a dark shadow. Several disturbing trends have emerged prompting some experts to advise older homeowners to think twice before considering a reverse mortgage.
5 disturbing trends
Some experts believe that a reverse mortgage should be a last resort. There are no restrictions on how the money is spent, and the loans have become a tempting refuge to help borrowers pay off short-term debt. Here are five disturbing trends in the current reverse mortgage market:
No. 1: Younger borrowers are choosing reverse mortgages. Reverse mortgages are designed for elderly homeowners to "age is place." Meaning, reverse mortgage funds are designed to allow older homeowners to remain in their properties until they pass away or need to move to an assisted-living facility. The younger you are, the less equity available to aid you through your retirement years.
According to Reverse Market Insight, the average age of reverse mortgage borrowers went from 76 in 2000 all the way down to 62 in 2011.
"The concern is: what will you have to fall back on when you are in your 70s, 80s and 90s," says Lori Trawinski, a senior strategic policy adviser at AARP Public Policy Institute. "People are living much longer than they ever expected to. There's a belief that people will eventually have to use home equity to fund their longevity, but at what point is it best to do that?"
No. 2: Borrowers are taking all the money at once. Currently, about 70 percent of reverse mortgages are taken as fixed-rate, lump-sum loans, according to the Consumer Financial Protection Bureau's report to Congress in June 2012. This segment increased by 30 percent between 2007 and 2011.
With reverse mortgage products, the fixed interest on a lump sum is folded into the loan and compounds over time. Younger borrowers, in particular, may deplete the value of their home-equity so it may not be available when needed. Aging seniors are likely to have unforeseen health expenses or may someday need to move to an assisted-living facility that they will no longer be able to afford.
No. 3: The largest lenders have left the market. The exit of MetLife, Bank of America, Wells Fargo and Freedom Financial has allowed smaller lenders to enter the fray. The CPFB warns that many of these smaller lenders are "not depository institutions."
"The changing economic and regulatory landscape faced by these small originators creates new risks for consumers," wrote the CFPB in their report to Congress.
No. 4: Some spouses are kicked to the curb. Another emerging concern regards non-borrowing spouses. Currently, some spouses are facing eviction after having been reportedly pressured to keep their name off the deed to the property, without being told that they could be left facing foreclosure when the older spouse died. The AARP Foundation litigation filed a lawsuit last year, suing HUD on behalf of clients who were non-borrowing spouses.
No. 5: Questionable marketing practices. Aggressive marketing practices and celebrity endorsements have prompted some to call these tactics into question. "Some marketing solicitations misleadingly or deceptively pitch reverse mortgages as 'free money,' or imply that the money comes from the federal government or that the borrower could never lose their home," wrote WRNicholsLaw in a recent blog post. "Such deception, when coupled with a complex product that offers confusing choices, makes it hard for consumers to evaluate whether the loan fits their needs."
6 reverse mortgage tips
Here are six suggestions from AARP's Trawinksi:
- Shop around among reverse mortgage lenders
- Understand it's a loan and clarify all your obligations
- Ask the housing counselor questions if there's anything you don't understand
- Consult a lawyer or a trusted financial advisor
- Discuss with family members
- Consider other options, such as a home equity line of credit, moving or investigating programs that can assist with utility bills, food and prescription medications
"Be wary of people who are encouraging you to take out a reverse mortgage and invest the proceeds in an investment or insurance product," says Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "Make sure that the house is affordable after the reverse mortgage including insurance, property taxes, and upkeep. Remember that the lender can foreclose if taxes and insurance are not paid. Once the decision is made to consume home equity through a reverse mortgage, it is much more difficult to move to another house."
Reverse mortgages are not suitable for every senior. For more information, consult the National Council on Aging's educational booklet on how seniors can remain in their homes as they grow older.
Judy Feldman, former senior reporter at Money Magazine for 16 years, lives in New York City and Long Eddy, N.Y. She has most recently been published at Inc.com, Insure.com and currently reports regularly for Morgan Stanley Smith Barney’s External Insights. She has written or reported for several other national publications, including Bottom/Line Personal, CBS MoneyWatch, Consumer Reports, ESPN The Magazine, FiscalTimes.com, Glamour, iVillage.com, Jewish Living, Martha Stewart, Parenting, Redbook and Self Magazines.
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