REVERSE MORTGAGES: ARE THEY FOR ALL ELDERS?

Reverse Mortgages are being touted as an easy answer to the income problems of many seniors face as they age.  On the surface, these expensive mortgages can seem very appealing.  But elders should think twice before signing on the dotted line Signing up for a reverse mortgage not only means signing away the equity in your home; it could also mean eliminating financial flexibility you may need later in life. 

Reverse mortgages have been around for many years but there has been a spike in the past few years.  Why the big jump?  These mortgages are exploding in number because they are now heavily marketed and very profitable.  In the past, reverse mortgages were sold as a way to solve the very serious issues of paying medical bills, utility bills and necessary home improvements.  Today, they are being sold for lifestyle enhancements, such as fancy vacations and expensive cars.  When used for such lifestyle enhancements, reverse mortgages are often not accommodating the elder’s long-term living concerns as in the past. 

Like a traditional mortgage, the amount of a reverse mortgage is based on the value of the home; however, instead of making payments to the financial institution the payments come to the elder.  Up front costs are very steep, averaging $16,000 in the Boston area.  Monthly servicing fees and mortgage insurance are charged on top of the standard rate.  Another consumer drawback is that all reverse mortgages are usually variable in rate, meaning the interest rate can be increased over time, which can accelerate the depletion of equity.  All of which adds up to a loan that can be extremely costly.  Often there may be a less expensive solution. 

A 24-year-old consumer protection agency, Homeowner Options for Massachusetts Elders (H.O.M.E.) has assisted thousands of people in finding the best and least expensive solution available.  Considered a national model, H.O.M.E. provides in-home counseling, reviews multiple options with elders and steers clear of loans whenever possible.  H.O.M.E. meets people 60 and older of modest means to determine their current financial situation.  They then develop both an immediate plan as well as a long-term plan.  They call this process “remainder of life planning.”  During the process they explore tax abatements and exemptions, home repair grants, low cost deferred loans, prescription assistance and much more. 

H.O.M.E’s working model seeks to preserve the equity pf elder homeowners.  They review reverse mortgages, along with other loans, as a last resort.  Len Raymond, founder and Executive Director of H.O.M.E. says that he, “rejects the notion that one loan fits all elders between 60 and 99 years of age.”  He adds, “Our menu of options available to elders is continually evolving.”  Currently, the menu includes solutions such as the first-in-the –nation Senior Line Of Credit (S.E.L.O.C.) as well as a term reverse mortgage, the nation’s least costly elder equity conversion, which ensures that seniors will not use more than 68% of their equity. 

There are a number of reasons elders seek out loans.  They may need money for one-time expenditures like home improvements or they may need on-going monthly support.  For those who need occasional assistance, the S.E.L.O.C. may be the answer because of the flexibility to take money out when it is needed.  For others who need additional monthly support, it may make more sense to consider a term reverse mortgage.  H.O.M.E.’s term reverse mortgage offers a fixed interest rate for a fixed period of time and funds are only available for genuine needs, not lifestyle enhancements.  This loan requires extensive counseling and planning for what will happen when the term ends.  As a consumer protection, they work with the bar associations and various lawyer groups to secure legal representation on a sliding scale; no cost or pro-bono is the case for a majority of their clients.  Term reverse mortgages have no mortgage insurance fees or additional costs.  CONSUMERS MUST BEWARE of lenders who put pressure on them to make a quick decision or one without consultation and assistance.  Elders should talk with family and trusted friends and not fall prey to getting a loan for other people’s needs. They should make sure they are dealing with a government chartered or licensed lender that offers a reverse mortgage plan approved by the Massachusetts Division of Banks.  Plus the law requires that elders be counseled by a state approved non-profit counseling agency.  In addition, elders should be fully understood the costs and how it works, but most important, the impacts well down the loan term, not just the beginning.  A lifetime of thrift and budgeting has done well for today’s elders.  That’s why they have accumulated valuable equity in their homes.  What worked for them over the years still applies in retirement.  Elders have options they may not even realize; property tax relief, supplemental social security income, fuel assistance, utility discounts and home repair assistance.  When these have been exhausted, there are potential loan options.  The key is to select the best one depending on the individual circumstances and long-term plan.  Reverse mortgages are very complicated, very expensive, and equity depleting.  There are less costly alternatives for most seniors.