Reverse mortgages may not be easy, safe money

The Bakersfield Californian
July 24, 2012

If you watch much television these days, hardly an hour will go by without someone pitching reverse mortgages to senior viewers. Even a former U.S. senator/presidential candidate is hawking these loans as safe, easy cash.

Under certain, limited circumstances, obtaining a reverse mortgage may make sense. But many are lousy deals that should be avoided unless a senior is down to his or her last dollar.

Here’s how they work: A reverse mortgage is basically a loan that allows the owner of a house or condo to convert a percentage of the property’s equity into cash. Unlike a traditional loan, the money does not have to be repaid until the borrower dies or no longer uses the dwelling as a primary residence. At that point, the lender takes possession of the home and sells it to reclaim the debt. To qualify for a reverse mortgage, the borrower must be at least 62 years of age.

Consider the case of John, a 62-year-old retirement planning client, whose 401(k) investments were slammed in the recent economic downturn. John recently suggested supplementing his retirement income with a reverse mortgage. His idea was to pay off debts with a partial lump sum and supplement his Social Security with monthly payments from the loan.

The amount of a reverse mortgage is based on actuarial, or life expectancy. Since John is 62, he would qualify for a loan of about 57 percent of his home’s $220,000 value. A 94-year-old borrower would qualify for an approximately 85 percent loan.

For a reverse mortgage to be a really good deal, John would have to live in his home for decades, or at least well into his 80s or 90s. But as people age, often failing health prevents them from living independently. And who knows how long John will live? Chances are that sooner, rather than later, the lender will claim John’s property.

A variety of reverse mortgages exist — some offering more favorable terms and payments. But the reverse mortgage industry can be filled with complicated, risky financial land mines.

High upfront fees, costs and vague disclosures have tainted the reputation of reverse mortgages. And brokers who pitch these loans often try to convince borrowers to invest lump sum payouts into risky financial schemes, or fee-laden insurance or annuity products to “maximize returns.”

In a report co-authored in December 2010 by Consumers Union and two advocacy groups, including the California Advocates for Nursing Home Reform, seniors were warned that risky reverse mortgages could result in borrowers losing their homes while they are still alive.

Consumers Union has posted reverse mortgage tips and news alerts on its website consumersunion.org. Additional information about these loans can be found on the U.S. Department of Housing and Urban Development website, hud.gov.

Reverse mortgages should not be considered easy, safe sources of retirement income. Before obtaining a reverse mortgage, seek the advice of a trusted financial adviser, accountant, or attorney.