Reverse Mortgages: Risk or Opportunity?
Americans suffered considerable loss of assets through the devaluation of their homes during this past recession. The mortgage crisis has hurt the finances of the young and the old. Relative to seniors, however, there has been emerging data that gives some important insights.
In a study released July 2012 (Nightmare on Main Street: Older Americans and the Mortgage Crisis), AARP conducted the first study to focus solely on the impact of the mortgage crisis on people age 50 and older. The study found that among people age 50+, seriously delinquent loans increased 456 percent during the five-year period, from 1.1 percent in 2007 to 6.0 percent in 2011. As of December 2011, 16 percent of loans for the 50+ population were underwater!
In an earlier study (Housing for Older Adults: The Impacts of the Recession), AARP also found:
- Housing costs are becoming more burdensome for older adults, and those who rent or own with mortgages are at greater risk of affordability challenges than those who own their homes debt-free.
- The percentage of homeowners who own their homes free and clear dropped, and the percentage who are still paying mortgages after age 50 rose.
- Households age 50+ are less likely to be married and living with a spouse than in the past.
Given these difficult financial trends, it’s not surprising that seniors look for mortgage financing opportunities. Reverse mortgages have been a topic of considerable focus in recent years as they have been heavily marketed by the mortgage industry as means for seniors to gain greater financial resources. In response to those marketing pressures, there have been increased regulatory pressures for better oversight. Reverse mortgages are a complicated financial product, and any decision of this magnitude deserves considerable research and care in understanding the pros and cons of such an important decision to refinance what for many seniors is their most valuable asset.
Recently the New York Times released a thoughtful article on the potential pitfalls associated with reverse mortgages. The information in this linked article serves as a word of caution, responsibility and education.
Reverse mortgages allow older homeowners to access the equity in their homes, providing a viable income source. Payment options include any combination of monthly payments, a line of credit, or a lump sum. Loan costs can be paid with loan proceeds. When the last surviving borrower dies, sells the home, or permanently moves away, the entire loan balance is due.
In the right circumstances, this type of loan can offer attractive benefits. However, like any investment there are risks, and this is where caution is introduced. The article does an excellent job highlighting the need for thoroughly understanding the risks associated with this type of transaction.
For example, even though no monthly mortgage payments are due, the property owner must still pay property taxes and homeowner’s insurance. Additionally, only the borrower named on the loan can assume the loan. If a single spouse or significant other is listed as a sole borrower on the loan and that person dies, the survivor has no rights to the property and the total loan amount is collected or the home becomes property of the loan originator.
Counseling requirements cannot be overstated. If you have one of these loans or are considering one, it is recommended you seek counseling from a trusted independent financial advisor in addition to any counseling that comes with the loan transaction. Building on that notion, at the end of this article is a list of resources to better inform you of how these loans operate.
The cautionary message in the article is clear; educate yourself and responsibly manage your risks.