Originated in 1961 in Portland, Maine, reverse mortgages allow people 62 and older to borrow money against their home’s equity and not pay it back until they move out or die. And when President Ronald Reagan signed the FHA Reverse Mortgage bill into law in 1988, it signaled the true modern era of reverse mortgages.
The name is a misnomer, however, because in actuality a reverse mortgage is a loan that can be taken as a lump sum, monthly payment or line of credit, U.S. News & World Reports explains (http://tinyurl.com/angmwb9).
It might sound like a great deal to your clients. But in many cases, the risks can outweigh the benefits.
No free lunch
A reverse mortgage is not free money— not even close.
As with any loan, there are costs attached, and origination fees on these loans are often high, U.S. News says (http://tinyurl.com/bk53tvo). Although your client won’t have to repay the loan until he moves out — such as to a nursing home — or dies, the interest rates on reverse mortgages start accruing immediately and are often significantly higher than traditional home equity loans.
In addition, The New York Times points out, your client is still responsible for property taxes, insurance and maintenance on the home, which further eats into the money he’ll get from taking out the loan (http://tinyurl.com/8govp49). These fees could be written into the reverse mortgage, but that just means there will be more to repay later.
Other sometimes hidden costs include not putting both spouses on the reverse mortgage deed. The Times documents the plight of San Bernardino, Calif., resident Joan Serioux-Forde, who was forced out of her home after her husband died because she couldn’t repay the nearly $300,000 he owed on the loan.
A reverse mortgage can also end thoughts of leaving a legacy to your client’s heirs because when your client dies or moves out, their heirs would have to pay off the loan to keep the house.
Otherwise, it will be sold to cover the amount, leaving your client’s children or grandchildren with nothing.
Change is good
Before taking out a reverse mortgage, your clients should ask themselves if they really need that trip to Italy (shady lenders, The Times reports, often tout vacations as a reason to take out the loan). As U.S. News says, a reverse mortgage should not be a first option but rather a last resort. There are other ways to cover the cost of wants, needs or desires in retirement.
The easiest to say and perhaps hardest to do is changing your clients’ lifestyle. Are there things they can do without, such as every premium cable channel? Getting rid of these can save up to $100 a month depending on the cable provider. Your clients could sell off some of their assets, whether antiques or several acres of their land.
Or your clients, like many seniors these days, could take a part-time job or contract work to help fill their monetary needs. Besides bringing in extra income that can be used for that trip, it increases the amount of Social Security benefits they receive — and might end the need for a reverse mortgage altogether.
We hope this information was useful to you and helps your clients and their families. If you have a specific case or a question, don’t hesitate to call our office. As always, feel free to call us for further advice or to share your ideas.
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