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Reverse Mortgages

This article was written by in Real Estate and Home. 24 comments.


Homeowners over the age of 62 have a unique option available for accessing cash. Reverse mortgages can help seniors access home equity without having to make monthly payments to repay a loan. When a qualifying homeowner has paid off a mortgage in full, or is very close to paying off a mortgage, a reverse mortgage (or home equity conversion mortgage) can turn the equity into cash through a payment plan. The reverse mortgage is repaid from the proceeds when the owner sells the house.

For seniors who have discovered their expenses are higher than what they’ve planned, a reverse mortgage can help pay the bills. Considering you can’t take your wealth with you when you die, there’s always a case for spending down your assets while you still have time to enjoy your life.

If those are two of the benefits to reverse mortgages, they may be easily overshadowed by the drawbacks.

  • Reverse mortgages are expensive. Just like regular mortgages, you’ll have closing fees and points to pay. They’ll be rolled into the loan amount, so when you or your estate pays back the mortgage when the home is sold or when you die, you’ll owe more than the converted equity plus interest.
  • You’ll be at the mercy of the market. Reverse mortgages have interest rates, just like regular mortgages. This interest will also add to the total you’ll need to repay the mortgage after the sale, and if this interest rate is higher than inflation, you’re losing more overall value.
  • You might not qualify for Medicaid. The proceeds from a reverse mortgage increase your income. If you’ve been relying on Medicaid, you may no longer qualify.

The first point above, the fact that reverse mortgages are expensive, is an important point to consider. Here are some of the expenses associated with reverse mortgages:

  • Mortgage insurance (2% of the appraised home value)
  • Origination fee (up to $6,000)
  • Title insurance
  • Title, attorney, and county recording fees
  • Real estate appraisal ($300–$500)
  • Survey ($300–$500)

In order to qualify for a reverse mortgage, the U.S. Department of Housing and Urban Development (HUD) requires you to receive counseling, which helps borrowers understand the concepts of reverse mortgages and identifies the best lenders.

Wells Fargo and Bank of America have recently exited the reverse mortgage business. They say that HUD requirements go to far to limit lender’s profitability, but in all likelihood, lenders are having a harder time making money from reverse mortgages — which were very profitable during the height of the real estate market — now that home prices are low. Reverse mortgages, like traditional mortgages, are packaged and sold to investors, and if lenders are having a difficult time finding investors for these securities, they’ll stop doing business.

While Wells Fargo and Bank of America are no longer offering reverse mortgages, MetLife is increasing its reverse mortgage business.

Due to the high fees, most reverse mortgages are seen as predatory products. I can understand the appeal of getting access to cash locked away in home equity, but it comes at a high price. Many people argue that you can’t be buried with your wealth, but there are ways to make it work for you after your die if selling your house is not appealing while you’re still alive.

Photo: Warren Brown Photography

Updated July 15, 2013 and originally published June 22, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 24 comments… read them below or add one }

avatar cashflowmantra

It would make sense that the banks are exiting the business due to profitability. With home prices declining, they run the risk of some old person outliving the equity in the house. Banks are only in it for the money. I am starting to hate banks.

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avatar wylerassociate ♦162 (Cent)

it also depends on age. I’m not a homeowner yet but if I pay off a mortgage for a house I don’t want to take out another one when i’m in my 60s.

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avatar Pat S

It’s unfortunate that people get themselves in a position to need this type of financial product. If at all possible, don’t do it. Its a terrible deal for everyone except the banks… Just dont.

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avatar shellye ♦107 (Cent)

It’s sad that there is actually a market for this type of product.

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avatar Luke Landes ♦127,475 (Platinum)

I’m not sure I agree that it’s sad that there’s a market. Why shouldn’t people access their equity as they age? If anything, it’s sad that the fees tend to be high, and many people who get into reverse mortgages don’t fully understand how the loan works.

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avatar Investor Junkie

They can always sell their place and rent no? I don’t understand why people don’t do that instead.

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avatar skylog ♦368 (Nickel)

that is a good point, and one that many should probably explore but do not.

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avatar SteveDH

Unfortunately we are too ignorant to know when a reverse mortgage is a good thing to do. Not stupid – ignorant. We don’t have a date specific when we are going to die. Therein lays the problem. How do you decide when a reverse mortgage is going to last the rest of your life, because if it doesn’t, your right back where you started from. If you’re having trouble meeting needs there are better means of assistance you can apply for without jeopardizing your future completely. When they say you can never be forced to leave your house (in advertisements) they mean the Bank or Insurance Company can’t force you out – but if you’ve lived past that all-important prediction, you can certainly be forced out because you can’t heat the house or pay the other utilities which make it livable.

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avatar SteveDH

Oops – I forgot to reach a conclusion: Reverse Mortgages have to be considered only as a last resort. Which also means 62 seems way way too early to even be thinking about it.

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avatar rewards ♦31 (Newbie)

Same can be said for annuities and pensions. We trade our “premium” for stability.

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avatar SteveDH

True but most pensions or annutities don’t have and end date unless you choose a period certain – they generally last as long as you do. Reverse Mortgages have a set payout and when that value is gone it’s gone.

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avatar Evan

I am not exactly sure why everyone is so quick to rip on these products.

You have a 65 or 68 year old with no cash, no real income beyond lets say Social Security…what good is a paid off house when they have to eat Cat food (obviously an extreme example)? This product, is a way to unlock cash flow that doesn’t make one susceptible to a foreclosure (as a traditional refinance).

Is it for everyone? No way but what product is?

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avatar SteveDH

As far as your product question: Beer….. Is Evan a pen name for Henry Winkler …. just kidding. I didn’t want to totally rip the product just emphasize it should used as a last resort. When the ads talk about “Living retirement the way you want it” it really seems like a bad idea for most. But using it to eat – that’s a different story.

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avatar Evan

You know SteveDH, you are right beer is for everyone! At least we can come together on that.

I don’t get the Fonz joke thought?

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avatar SteveDH

The Fonz is doing “One Reverse Mortgage” ads on TV for Quicken Loans. That’s where I heard the live your retirement the way you want (may not be a direct quote) statements.

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avatar Investor Junkie

Evan,

My mother is in this exact boat. Not much savings, but expects to do a reverse mortgage on her fully paid condo. Right now she’s perfectly capable of working, but she’s not. She in fact left a few jobs because they weren’t paying enough. If I were in my mom’s or what you suggest other’s position, I would be working my ass off… until I couldn’t.

A reverse mortgage should be of last resort.

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avatar Evan

As long as she is all there, I think she has a healthy attitude…it is her asset to do what she wishes.

A lot of heirs apparent (not saying you) believe they know what is better for the aging parent, and if she would rather “spend down” her asset than work, why not?!

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avatar Investor Junkie

I already know I won’t see a dime. I’m not worried about that. I’m worried I’m going to have to support her!

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avatar Tom Dziubek

A couple of other costs that many people don’t think about once they enter these mortgages: they still have to pay property taxes and home insurance. This is part of the reason why Wells Fargo stopped doing reverse mortgages past week.

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avatar Investor Junkie

They “receive counseling”? Do they go see a therapist?

How about this.. If you don’t understand what you are doing, don’t do sign it?

I know elders are typically targeted for money scams though. Then again so are people at any age.

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avatar Luke Landes ♦127,475 (Platinum)

I would imagine the counseling is similar to student loan counseling, where you have to sit through a presentation from a trained individual who explains how the mortgage works and who provides materials for reference and forms to sign. I’m not sure how effective it is.

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avatar Investor Junkie

Student loan counseling? I didn’t know there was such a thing.

If we have that type of counseling we should have baby counseling since that affects our lives (and the world for that matter) the most.

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avatar Investor Junkie

Let me add related to student counseling. Does the counseling suggest not getting into 200k of debt for a sociology degree? Or does it just go into explaining the debt itself?

I assume for the reverse mortgage they do the same and just discuss the debt itself. Not how it should/shouldn’t be spent because that’s too politically incorrect.

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avatar qixx ♦1,890 (Half-Dollar)

If your max payout is set (i’m guessing based on home value) can you refinance your reverse mortgage for a higher monthly payout if your home value increases?

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