Is a reverse mortgage right for you?
Another change from the new housing bill: Easier and safer reverse mortgages for America's seniors. Still, it's a better option for some homeowners more than others. Lenora Chu reports.
Using the value of your home (iStockPhoto.com)
More on Retirement - Saving, Housing - Real Estate
TEXT OF STORY
Tess Vigeland: Earlier in the show, we heard some of the details of the housing bill, but here's one provision we didn't get to: The law makes it easier and financially safer for seniors to get reverse mortgages. It puts limits on the fees banks can charge for them. Lenders also cannot require borrowers to buy insurance products like annuities in order to qualify for the loan.
Now, for those of you who aren't sure what a reverse mortgage is, Lenora Chu has a primer.
Lenora Chu: Tom Robinson has a good job as a project engineer in Long Beach, but when his elderly mother started needing help around the house, he knew he couldn't carry the financial burden alone.
Tom Robinson: She's on a limited income obviously. Being 82, she didn't have much from what my dad had left her and her house was gonna start needing some repairs.
Robinson had seen ads for reverse mortgages on television and his mother had been getting flyers in her mailbox. In December, they signed on the dotted line. The loan tapped into the equiStity she'd accumulated to pay off her mortgage and get rid of her monthly payments and it left her with a $20,000 line of credit to draw down for a paint job, plumbing repairs and the occasional splurge. When his mother passes on, there will be less equity to leave to her children, but Robinson says he's not bothered.
Robinson: Not really knowing how long she was going to be here with us, we felt she might as well enjoy life while she can.
That's ideally how a reverse mortgage is supposed to work, says Meg Burns of the FHA. The FHA insures 9 out of 10 reverse mortgages in the United States. All are offered through traditional lenders.
Meg Burns: It's a good way for seniors who have some equity in the home, value in the home, to tap into some additional resources to live more comfortably.
Demand for reverse mortgages is expected to rise, but many consumer advocates continue to see reverse mortgages as a last resort for house-rich, cash-poor seniors.
Kathy Kristof: It's one of the options, it's just an expensive option.
That's personal finance columnist Kathy Kristof. She points out that mortgage insurance and origination fees will put you out 4 percent of the value of the property. Then there's a service charge that averages out to $30 a month over the life of the loan.
Kristof: And these fees can add up to tens of thousands of dollars, even on a relatively small reverse mortgage.
Kristof suggests considering other options first, such as downsizing to a more affordable home to free up some cash. Some local governments also sponsor programs that get seniors into similar loans with lower fees. Or you could sell the home to your adult children and rent it back from them.
There are also a few scams to watch out for, says Burns of the FHA. Beware of brokers who sell you a reverse mortgage and encourage you to use that money to buy another one of their financial products.
Burns: And that is because the interest rate you will pay on that loan will likely be higher than any interest you would accrue through the investment vehicle or savings account.
And don't let anyone convince you to draw down the entire loan balance at once -- you'll be accruing interest on money you don't necessarily need. And one more thing, says financial adviser Michael Laine. Because upfront fees are hefty, take out a reverse mortgage only if you plan to stay in the home for a few years.
Michael Laine: As long as the client will be in the house for a sufficiently long period, the expense is amortized over time.
In other words...
Laine: If you plan on dying soon, let's not go this way.
But Laine says, happily, most of his clients plan on sticking around for a long, long time.
In Los Angeles, I'm Lenora Chu for Marketplace Money.
Comments
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From Savage, MN, 08/09/2008
Has the limit been raised for reverse mortgages to $417,000 as was proposed several months ago?
From Irvine, CA, 08/08/2008
Lois: Sample figures/calculators are available online from AARP's website, for one. Regarding buying a home for your kids: A Reverse Mortgage is available to homeowners age 62 and over who own and occupy their property as their primary residence. I recommend the websites of AARP and HUD for more information.
From AZ, 08/07/2008
I would like to see sample figures to verify costs Say a $250.000 house, no mortgage, varied amounts of equity to use, fees, etc. Would it make sense to help your kids buy a house with a reverse mortgage?Negatives and positives.
From AZ, 08/07/2008
I'd like to see figures on sample reverse mortgages to verify costs: take a $250,000.house, no mortgage, show fees, various payouts, etc.
would it make sense to help your kids buy a house?
From AZ, 08/07/2008
I'd like to see figures on sample reverse mortgages to verify costs: take a $250,000.house, no mortgage, show fees, various payouts, etc.
would it make sense to help your kids buy a house?
From AZ, 08/07/2008
I'd like to see figures on sample reverse mortgages to verify costs: take a $250,000.house, no mortgage, show fees, various payouts, etc.
would it make sense to help your kids buy a house?
From Irvine, CA, 08/05/2008
Tom was my client. The story and comments are good, yet overlook a major benefit of a Reverse Mortgage and reason for the fees: These are non-recourse loans; that is, you can never owe more money than the home is worth. The lender would eat the loss. Also, the funds you receive are tax-free!
From Breckenridge, CO, 08/04/2008
I,too, wonder about the wisdom of advising older people to "downsize." First of all, moving for an elderly person can be a very traumatic experience. But, beyond that, there are pockets in the real estate market--like the resort community where I live--where downsizing really isn't an option: there's very little available that is both cheaper and desirable. Leave the resort community? Yes, that could be done. But not to someplace as pleasant as this is or where friends made over the years will be available. I plan on using a reverse mortgage as a last resort, looking into a home equity line of credit instead (which, strangely, hasn't been mentioned). But if I find myself strapped for, say, $10,000 a year in order to enjoy life in my mid-70s to the end, why not?
From Eau Claire, WI, 08/04/2008
I am a RM Specialist, however prior to doing this I helped my parents do this. I can tell u first hand that without this, they would not be able to do all that they are able to do because of it. How about the senior who was born in the home, and knows nothing different, to tell them to downsize from 100,000 home, how do they do that. This is an AMAZING opportunity for a senior and yes the costs are high, however what about the costs of the credit cards they are using to meet those monthly expenses, this is far less, and much more feasable! I will yell from the tree tops for seniors to listen and to learn how this works, it is for them!!
08/03/2008
What percentage would you pay if you sold your home to downsize? About 4 or 5 percent. That's about the same as the cost of the reverse mortgage, right? So why sell when I can stay in MY home for life? And besides, in this market you can't downsize. Once you payoff your mortgage theirs nothing left to use to buy a smaller place, except maybe STORAGE space. I often wonder if these PROFESSIONALS we hear talking about senior issues actually know any seniors.
From Ft. Lauderdale, FL, 08/02/2008
Is a rev. mtg. really too expensive? The expense for a rev. mtg. is really the use of equity in the home. You don't write checks, spend cash or go to the cookie jar. What good is equity if you can't use it? What did we get for all that equity we had in our homes 1-2 yrs. ago? Absoulutly nothing. 20% - 50% of this thing called equity has gone down the drain with the economy. If that equity was used to get a rev. mtg. that would have been a positive use of "equity". Equity is not money. You can't make a mtg. pymt. or pay for gas until you convert that equity to cash by selling or refinancing and then you would have to move or start paying back the loan. Equity is like having a oil well in your back yard. It dosen't do anything for anyone until it brought out of the ground,refined and converted for use. Again, the "cost" to pay for this process is from the "equity" in the oil.
P.S.Yes, I am in the Reverse Mortgage Business
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