Reverse Mortgages: Consider All Sides Before You Leap

There’s been a lot of talk in San Antonio recently about reverse mortgages, with two different pieces in the Express News laying out some of the benefits they offer. Like every major financial decision, however, reverse mortgages should be gone into carefully because they’re not a good decision for some people. I want to make certain that you have the full story, so I’d like to lay out, briefly, some of the questions everyone should ask themselves before taking on a reverse mortgage.

First off, it is true that reverse mortgages can and have helped seniors who own their homes to convert their home equity into cash. By taking the money out, in a lump sum or over time, you are, in effect, selling your home back to the bank as they first sold it to you. If you decide to do this, the Department of Housing and Urban Development has a list of the “Top Ten Things to Know if You're Interested in a Reverse Mortgage” that can help you work your way through. The Federal Trade Commission also offers advice on what to watch out for. (They may also be able to help if you suspect possible fraud.) But whether you should take out a reverse mortgage is another question altogether.

Perhaps the most important thing to know is that reverse mortgages are very expensive. Just as you probably needed to save up for a down payment before buying a home, there are a lot of up front costs to reverse mortgages. If you stay in your home for a long time, spreading those costs out over many years can make them a good deal. But if you should decide to sell after a few years, if you decide to move closer to your children for example, those costs can hurt. You should also remember that the word “reverse” is used intentionally. With a regular mortgage, you take on a lot of debt when you buy your home and, over time, you pay down that debt. With a reverse mortgage, your debt goes up each year as your equity, the part of your home that you own, goes down. If you’re old enough for a reverse mortgage, over 62, but still young, in your sixties like me, the interest accrued can be very significant.

Because reverse mortgages are available to senior citizens, AARP has done a great deal of research into the matter, and they offer a number of resources on their website. The comprehensive booklet that AARP puts out is available here (pdf) and I particularly recommend their audio presentation, “Reverse Mortgages: What You Need to Know”. There are also, as in every aspect of life, some unscrupulous people to avoid. Last October, the National Consumer Law Center called reverse mortgages “Subprime Revisited” and warned about this. Consumer Reports and ConsumerAffairs.com have both written about some of the risks. It was not without reason that Texas’s constitution once banned reverse mortgages and why – thanks to my friend, Rep. Jan Schakowsky – the financial regulatory reform law we just passed directs the new Bureau of Consumer Financial Protection to look into the industry.

None of this means that you shouldn’t get a reverse mortgage. For many seniors, reverse mortgages offer a great option. But for many others, there are other and better options available. I want you to have the information you need to make the decision that’s best for you. I hope that some of these resources will help you to do that.

Sincerely,

AARP Resources:

AARP’s main page on Reverse Mortgages: http://www.aarp.org/money/credit-loans-debt/reverse_mortgages/

AARP’s “5 Questions To Ask Before Considering a Reverse Mortgage”: http://www.aarp.org/money/credit-loans-debt/info-2007/5_questions_to_ask_before_considering_a_reverse_mo.html

AARP Audio Presentation: http://www.aarp.org/money/credit-loans-debt/info-04-2009/Reverse_Mortgages.html

Government Resources:

HUD’s page on Reverse Mortgages: http://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm

HUD’s Top 10 Things to Know: http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm

FTC’s page on Reverse Mortgages: http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm