In our May 2015 newsletter article “Understanding Reverse Mortgages,” we presented an overview of what reverse mortgages are all about. We described briefly some of the features of a reverse mortgage: how a reverse mortgage works, how borrower eligibility works (and what it takes to qualify for a reverse mortgage), and we touched on some of the benefits afforded to a prospective borrower by a reverse mortgage. The purpose of this article is to provide further detail on reverse mortgages and how they aid a borrower in reaching their financial goals.
Many of you have probably seen the television advertisement featuring the “Happy Days” star Fonzie and his presentation of the benefits that come with using a reverse mortgage. Anything endorsed by the Fonz has got to be good, right? Well, welcome to the real world: that is not necessarily true.
As the May 2015 publication points out, a reverse mortgage is geared for homeowners who are the age of retirement or older. Essentially, the mortgage holder gets cash installments sent to them based on the equity in their home. A reverse mortgage allows retirement age homeowners to stay in their houses while simultaneously using their built-up equity for any purpose such as fixing up the house, catching up with property taxes, or even just paying bills and living expenses. Furthermore, according to Reverse Mortgage Adviser: “borrowers must be at least 62 years old and must own their home. Eligible homes in this case include single detached homes as well as HUD-approved condominiums and dwellings. Trailer homes do not qualify.”
In addition, the federal government has quoted these disadvantages and pitfalls of reverse mortgages, as noted by the article quoted above:
Reverse mortgages can affect your eligibility for another type of loan.
This might affect the inheritance of the borrower’s heirs.
The borrower could lose his or her eligibility for Medicaid and Supplementary Security Income (SSI).
In addition, what most people do not know is that Medicaid and SSI see loan advances as cash assets or “liquid assets” when they are kept beyond the month that a recipient receives them. Borrowers with reverse mortgages may suddenly find themselves ineligible for those state benefit programs.
In my opinion, one of the more significant drawbacks is the potential inability of the borrower to leave their home to his or her heirs. A reverse mortgage can interfere in ways the borrower might not foresee without doing some research. For example, upon the borrower’s death or upon having to give up residency in their home in favor of taking up residence in a nursing care facility, the loan will usually have to be paid off immediately. This typically requires the sale of the home in order to raise the funds required to pay off the loan. Note, however, that the borrower is not necessarily the party who has to have the financial resources to pay off the loan. The home can be “salvaged” for the heirs by literally anyone who can pay off the loan.
Also, as the Motley Fool points out, the reality is that when you get a reverse mortgage, it won't be for the total value of your home. It will be for a portion of that, and your loan balance will rise over time as interest costs are added to it--that is, capitalized. When the mortgage ends and the loan needs to be repaid, you won't be on the hook for more than the balance of your home.
It’s rather interesting to note that panelists attending the San Francisco Seventh Annual Conference on Elder Abuse spoke on the subject of the “risks and dangers” of reverse mortgages. The following points were made on the topic at the conference:
What if the elder has to move out of the home into assisted living or a nursing home? The elder then has to somehow pay off the mortgage which has come due, in addition to the high cost of the assisted living or nursing home care. It can leave an elder homeless!!!
If the elder who needs care in a facility has non-borrowing family members in that home, the loan is still due. Anyone left in the home must move out, go to a care facility, or be taken in by someone else.
If an elder with a reverse mortgage fails to pay property taxes to keep up insurance on the home, or fails to maintain the home, he or she is in default. The lender can then foreclose.
In conclusion, it’s fair to say that there is much to be considered when taking out a reverse mortgage. Although there certainly are benefits, it’s not just “peaches and cream,” as the Fonz may have tried to convince the television audience.