Make no mistake; a reverse mortgage is a loan that over time could consume your entire equity. I call them the mortgages that keep on taking. Day by day, the borrower owes more money – not less. Start out with high fees and mortgage insurance added to the balance, and then compounded interest. By the time the senior is ready for the nursing home, there’s no money left.
The New York Times’ “Tapping Into Homes Can Be Pitfall for the Elderly” describes the high fees and potential unscrupulous behavior of those peddling reverse mortgages. At their best, reverse mortgages can be a very expensive annuity. At their worst, a financial advisor could funnel a lump-sum payout into a high fee investment or annuity. (It makes no sense to buy an annuity with proceeds when the reverse mortgage can be an annuity itself.) Other bad uses include emergency home repair or home improvements – onetime expenses.
Reverse mortgages allow seniors (62 and up) to start withdrawing equity from their home without actually selling their property. The seniors do not have to make any payments on their loans until they either sell or move out of their homes. In case of multiple borrowers (husband and wife), repayment is deferred until they both leave. The property must be a primary residence maintained to HUD standards, and all property taxes and insurance must be kept current. Wells Fargo (WFC) does not require the home be sold to satisfy the mortgage, just the loan be repaid.
The loan balance continues to grow while repayment is deferred, but the borrowers will never have to repay more than the value of their homes. Banks require this potential negative equity loss to be insured. Realty Times’ “Are Reverse Mortgage Premiums Too High?” says that HUD insures 90% of reverse mortgages (Home Equity Conversion Mortgages – HECM). HUD charges 2% of the home’s value (not loan amount) upfront and 0.5% of the loan balance each year. In addition, banks charge upfront fees of 2% or more on the home’s value and annual servicing fees. Any previous mortgages must be paid off at settlement. Wells Fargo allows a partial lump-sum payout to cover previous mortgages on the property.
The five payout options quoted from HUD:
- Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term - equal monthly payments for a fixed period of months selected.
- Line of Credit - unscheduled payments or in installments, at times and in amounts of borrower's choosing until the line of credit is exhausted.
- Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
- Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.
Wells Fargo’s reverse mortgages carry a variable interest rate, with the borrower choosing either monthly or annual adjustments. The interest rate adjustments do not change the payouts, only the rate of growth in the loan balance. Wells Fargo is very flexible in combining HUD payout options. (Other major banks did not provide any details on their websites.)
The Federal Trade Commission provides “Facts for Consumers” on reverse mortgages.
Disclosure: Author is long WFC.
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2 comments:
It's interesting that one of my clients actually calls her reverse mortgage "the mortgage that keeps on giving.
I'm assuming, (and I do know the dangers of assuming), that you do not personally know anyone who has a reverse mortgage. Yes, they can be an expensive loan. There are some up front costs. But remember, not a single penny comes from anyone's pocket, and the lender will not see a dime in repayment for years, maybe decades.
Your comment that "by the time the senior is ready for the nursing home", (if they ever need one), "there's no money left". Actually, in most cases, there is retained equity when the borrower(s) no longer live in the home due to appreciation in their home, and the fact that most seniors do not exhaust their reverse mortgage benefit.
Something to watch out for as a characteristic of the unscrupulous lender is when they either require or suggest you invest your loan proceeds. If they are not doing that, you're fine. It's your money. You receive it, you spend it on what you want. If they require you to purchase insurance, annuities or any such thing, get out and find someone else. It's not as scary as you make it sound. The instances of this happening is extremely minimal, but it does generate a lot of press.
I also beg to differ with your advice that it should not be used for emergency home repair. A recent client of mine is having their homeowners insurance canceled due to dry rot in their roof. You know what happens when you don't have homeowners insurance? I'm sure you do. They do not have thousands of dollars in their bank account to cover this cost. He is 67 years old and still working, and it's not like he can get a second job. But he does have quite a bit of equity in his home. Just like that, the roof can get fixed, he can keep his home, and even retire from his job because his monthly income from his reverse mortgage, (combined with not having an $1100/month mortgage payment), is all the margin he and his family need to live a comfortable life. (see the positive domino affect?)
The observations you make of Wells Fargo are not exclusive to them. These are universal to reverse mortgages anywhere.
To clear up something you said which can easily be misunderstood, HUD does not charge a mortgage insurance premium of 2% of the loan limit "each year". That is a one-time cost, and goes to HUD, not the lender. This only applies to the HECM loan. Jumbo loans on higher value homes have no such insurance, but they do include the same consumer safeguards of being non-recourse loans.
What is true in reverse mortgage is also true in each of us. Our strengths are often closely related to our weaknesses. What you consider a downside of reverse mortgage is a direct result of what appeals to so many; no required monthly payments. When you consider how much a "forward" loan costs over the 30 or so years of monthly payments and interest, you might be surprised to see how much that home actually cost you.
The bottom line is that reverse mortgages are not for everyone. Conversely, they're not for no one, either. Everyone should know their options if they have need. If it's right for them, great. If they have better options which suit them, that is great, as well.
Thanks for your time.
Original poster is ill informed. Yes, the cost is considerable. However the cost of all loans is considerable, it is usually disguised in the manipulation of the numbers. For example, you can choose a 4.5% loan today but you'd have to pay an up front fee of about 6% to get it. The same bank will let you get a rate of 6.75 and they pay all the closing costs. If you are to pay the usual costs the rate would be perhaps 6%. So, the typical reverse loans don't allow any choices like that. They have you pay the going rate with the closing costs.
Still it can be a great deal for a homeowner. If they don't take a reverse many will be forced to move in with family or go rent something. If they sold and then rented, their savings may soon be consumed by rental. Then in ten or fifteen years, they'd be back in the same boat except rents would be higher and their income would be not much higher. Further if one of the spouses dies, then their income could be considerably less with the loss of a pension or a SS check. Plus, they'd have had to move once or twice. With the reverse they can save thousands in moving fees and stay home for both lifetimes with no payments. Value? Priceless, as they say.
The borrower can cancel some of that interest by simply making a payment back to the credit line if he chooses. It is never required, but it is not refused either. Rather than that, to stay liquid they could just put some back into a savings account.
They have solved a problem of liquidity and income and can take care to preserve their assets if they choose. It is not their duty to preserve the asset for their heirs. If the heirs are so concerned about their welfare they could simply send them money each month and the parents would not need additional income. Even better, they could let the parents move in with them and the parents would have no housing expense (unless they had to pay rent, and in that case why not just stay home and have peace).
Yes, it's expensive as is any other loan, but it is a business decision made for a number of reasons. Most of them are good reasons.
Yes, I do reverses for a living. I don't even suggest annuities and I counsel borrowers to be careful. Some of them are quite well off, just illiquid.
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