September 9, 2005
By: Jim Oosterman
Reverse mortgages are being touted as an easy answer to the income problems many Massachusetts seniors and people around the country face as they age. On the surface they can seem appealing, but elders should think twice before signing on the dotted line. Signing up for a reverse mortgage not only means you are signing away the equity in your home and likely your single most valuable asset, it could also mean you are eliminating the financial flexibility you may need to tap later on in life.
Reverse mortgages have been around for years, but there has been a spike in the last couple of years in the number of these types of mortgages. Why the jump? These mortgages are exploding in number because they are now heavily marketed by financial institutions and they are very profitable. Reverse mortgages have been sold as a way to solve the very serious issues of paying medical bills, utility bills, or making necessary home improvements, but they are now also being marketed for lifestyle reasons, such as a way to take a trip or buy a new car. Unfortunately these types of mortgages are not necessarily accommodating people’s needs any better than in the past.
Like a traditional mortgage, the amount of a reverse mortgage is based on the value of the home. However, instead of you making payments to the financial institution, the payment comes to you. With an open-ended insured reverse mortgage other factors are considered in determining the payment amount, such as age. The older a person is, the greater the amount of cash they could receive. Upfront costs are steep averaging $14,000 in the Boston area, and they include closing costs, origination fees, and mortgage insurance fees. A monthly servicing fee is also charged. All reverse mortgages irrespective of type use compounding interest, which adds up faster. In addition, these loans are generally variable in rate, which can deplete equity even faster if rates rise. This all adds up to a loan that can be very costly. Very often there is a less expensive solution.
There is a consumer protection agency in Massachusetts called Homeowner Options for Massachusetts Elders (H.O.M.E.) that has assisted thousands of people in finding the best and least expensive solution. H.O.M.E. is unique in that they provide in-home counseling, they review multiple options, and they steer clear of loans whenever possible. H.O.M.E. meets with individuals 60 and older of modest means to determine their current financial situation, and to come up with not only an immediate plan, but also a long-term plan. They call the process “remainder life planning.” During the process they look for ways to assist elders in meeting their financial obligations such as through tax abatements or exemptions, home repair grants, low cost deferred loans, or such help as prescription assistance.
H.O.M.E. seeks to preserve elders’ equity, and so they view 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 old.” That’s why he says, “our menu of options available to elders is continually evolving.” That menu includes innovative solutions such as the first-in-the-nation Senior Equity Line of Credit (S.E.L.O.C.) and a term reverse mortgage which ensures seniors will not exceed 65 percent of their equity.
There is a diversity of reasons why elders seek out loans. They may need money for a one-time expenditure, like a home improvement or for continuing monthly support. For those who need occasional assistance, the S.E.L.O.C. can be the answer because of the flexibility to take money out only when it is needed. For others who need additional monthly support, it may make the most sense to consider a term reverse mortgage. H.O.M.E.’s term reverse mortgage is a fixed interest rate, for a fixed period of time and the funds are only available for genuine needs, not for lifestyle reasons. This loan requires extensive counseling and planning for what will happen when the term ends. As a consumer protection, H.O.M.E. requires independent legal representation for all elders at closing. In order to assist with this, they work with the bar association and various lawyer groups to secure legal representation on a sliding scale or at no cost, which is the case for a majority of their clients. Term reverse mortgages have no mortgage insurance fee or additional charges or costs, and they are the lowest cost reverse mortgage in existence.
Raymond warns to beware of lenders who put pressure on you to make a decision quickly or to make a decision without consultation or assistance if desired. He encourages you to talk to family and friends, but stresses not to fall prey to getting a loan for other people’s needs. Make sure you are dealing with a state or federal chartered or licensed lender and one who has a reverse mortgage plan approved by the Mass. Division of Banks. You must be counseled by a qualified and state approved non profit counseling agency. Make sure the costs and answers to your questions are explained clearly.
A lifetime of thrift and budgeting has done well for today’s elders. They have accumulated valuable equity in their homes. What has worked for them over the years still applies to them 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 circumstance, needs, and long term plans. Reverse mortgages are very complicated, very expensive, equity depleting, and for most seniors there are often less costly alternatives.