Reverse mortgages (RMs) are loans that enable homeowners who are at least age 62 to convert home equity into cash. The homeowners don’t have to repay the loan as long as they stay in their home. The interest and fees are typically paid when the home is sold or the homeowner dies.
Financial columnists traditionally advised homeowners to avoid RMs. Reasoning: RMs were too expensive for the benefits they offered, also full of pitfalls, and often inferior to other options.
My August 2009 Serpent article “Avoid Reverse Mortgages” cited the USA Today article “RMs Can Be Costly as Seniors Cash in On Equity.”
Two recent newspaper articles offer updates and downsides:
New Math on RMs—Advisors now promote them, thanks to recent safeguards. The Wall Street Journal, March 21, 2016: “The RM Stabilization Act of 2013 prevents homeowners in most cases from taking all their equity at once. … Other recently enacted regulations require homeowners to demonstrate they are able and willing to pay their property taxes and home insurance.” They also must cover maintenance and repairs.
Revival of the RM—Under the right circumstances, older borrowers may benefit. The New York Times, June 11, 2016: “Financial con artists have persuaded borrowers to put the proceeds in inappropriate investments, and some spouses who weren’t on the mortgage have lost their homes. … RMs are complicated and [potentially] messy for borrowers with surviving spouses or heirs who hoped to inherit the home.”
The webpage aarp.org/revmort offers topics including:
- RMs Now Harder to Get
- Are RMs Helpful or Hazardous?
- Are RMs Risky?
Clicking on “Scott Burns” at assetbuilder.com and searching “reverse mortgages” yields numerous results, including:
- Why RMs Are Important. April 8, 2016
- RMs Are Expensive and Must be Done Carefully. April 13, 2016
- RMs Have Their Plusses and Minuses. The Dallas Morning News, June 9, 2016
- The Dark Side of RMs. The Dallas Morning News, July 15, 2016
Nearly 40% of senior citizens carry a mortgage today, according to Harvard University’s Joint Center for Housing Studies. More than 60% of RM borrowers take a lump sum to pay off an existing mortgage. Then again, a line of credit is typically smarter than borrowing a lump sum to hold as a reserve.
In Scott Burns’s April 2016 article, “Reverse Mortgage May Ease Retirement,” he offers a scenario for those who have a bunch of equity in a costly beast. They use half of their equity to move to a lower-cost home and get a purchase money reverse mortgage, putting down 50%. Then they have no mortgage payment and access to the other half of their equity for non-shelter expenses.
Though RMs have become more viable, the consensus remains that they are a tool of last resort.