A reverse mortgage can be a useful way for seniors to convert home equity into cash to use during their retirement years. There are no monthly payments involved – the loan does not have to be repaid until all borrowers move, pass away, or sell the home.
For a significant number of homeowners, their home is the greatest asset they have. This makes a reverse mortgage appear to be an attractive option. They do work well for some senior homeowners, but others have run into difficulties making payments and keeping their homes. As a result, reverse mortgages have declined significantly over the past five years.
Known as HECMs for Home Equity Conversion Mortgages, HUD-insured reverse mortgages represent virtually all reverse mortgages issued in the U.S. According to information from the National Reverse Mortgage Lenders Association (NRMLA), the number of HUD-insured reverse mortgages dropped from a peak of near 115,000 in fiscal 2009 to just over 79,000 in fiscal 2010.
The decline has continued, with 40,534 reverse mortgages so far in 2014 with one reporting quarter remaining.
These are a few of the reasons reverse mortgages are falling out of favor.
- Falling Home Prices – Declining home prices led to a decrease in collective home equity after the housing crash, and prices have not fully recovered. There may be fewer reverse mortgages because fewer homeowners have sufficient equity to qualify for loans.
- Fees – A reverse mortgage may tap assets that homeowners already have, but it is still a secured loan with associated fees and costs. In the case of reverse mortgages, the fees can be surprisingly high.
The Center for Retirement Research (CRR) at Boston College estimated that a loan on a $250,000 home could result in total fees of $8,250. Homeowners may find cheaper credit through a home equity loan or other, more conventional loan without the risks of reverse mortgages (see below).
- Repayment Terms and Risks – Since reverse mortgages are due in full when one of the qualifying conditions is met, several consequences have caught seniors and their heirs by surprise.
If a husband and wife were not listed as co-borrowers, and the borrowing spouse passed away or had to be placed in an eldercare facility (permanently moving out of the house), the non-borrowing spouse was stuck with immediate repayment of the mortgage. Some seniors found themselves foreclosed on and displaced by not understanding this rule.
A reverse mortgage can also “trap” a borrower into their home. The borrower may reach a point where he or she requires an eldercare facility, but is trapped by the double whammy of a reverse mortgage bill on top of the costs of the eldercare facility. He or she cannot risk staying in the home, but cannot afford to move, either.
A condition of the reverse mortgage is that all property taxes and fees are paid and that the homeowner maintains the home and does not let it degrade. As our physical and mental skills decline with age, the necessary maintenance becomes more challenging.
- Effects on Heirs – Heirs are stuck with paying the total principal, fees, and accrued interest before they can claim the property. If heirs are unable to pay, the lender can foreclose and resell the property.
Congress recently passed legislation to strengthen protections for those holding reverse mortgages, but the risks are tangible and still remain.
A reverse mortgage may still be a reasonable option for you, but consider all the risks involved and look over your other credit options first. Their popularity is falling for tangible reasons.