Reverse Mortgage Loan Blog

Expert: Reverse mortgage ‘not for everybody’ 

The woman was in her 80s, lived alone in an older home and needed a new furnace.

Although her Social Security provided enough for day-to-day expenses, there wasn’t enough left over for the home improvement project.

She turned to John Pecha for advice — asking whether a reverse mortgage was an option.

Pecha, a Wisconsin-based senior reverse mortgage specialist with River Funding Corp., promptly guided her elsewhere, telling the homeowner that cashing into the equity on her home to pay for a furnace was risky.

A lifesaver for some and a precarious endeavour for others, a reverse mortgage is at a minimum a contentious venture. It has been rapidly gaining in popularity as a way for homeowners to access what is often their most valuable asset, their homes.

Of the 345,762 reverse loans insured to date by the Federal Housing Authority, nearly one-third were made in 2007, according to the AARP Public Policy Institute and the U.S. Department of Housing and Urban Development.

A reverse mortgage allows the homeowner to convert a portion of their home equity into cash, and repayment is not required until the borrower is no longer living in the home.

The program can provide a crucial helping hand for people really in need.

“In general, the aging community kind of agrees that in the right circumstances, reverse mortgages really can be a lifesaver for people,” said Ann Black, Iowa AARP associate state director for communications.

Although it can be a means to access a substantial amount of money, Pecha said those planning to sell their homes within a few years or those who have enough for living expenses but need a lump sum should seek out other options.

“For the right person, this is a good choice, (but) it’s not for everybody,” he said.

Black added that although they are gaining in popularity, reverse mortgages can be detrimental for those who take them on too soon.

You must be 62 to qualify for a reverse mortgate, according to federal program regulations, but Pecha said the average age is 73 or 74.

He said those on the younger end of the spectrum need to take a closer look at what their needs are before going with a reverse mortgage, and Black agreed.

“People really do need to consider all their alternatives, whether it’s selling their home, getting a home equity loan,” she said.

Black cautioned against taking on a reverse mortgage for anything but the most critical expenses.

“People should never take out a reverse mortgage to invest in the stock market. These are expensive loans, and you need to really understand what you’re getting into,” she said.

Reverse mortgages can be costly, often in the range of 5 to 7 percent of the exposed value of the home. The exposed value can be either the appraised or lent value of the estate.

And reverse mortgages have been known to cause strife between generations of family members. Pecha said he urges people to consider that if their parents or grandparents are encountering difficulty financially, there is a high likelihood that any inheritances could be eliminated anyway and a reverse mortgage will ensure that only a small portion of the estate will be taken at a time.

Still, Pecha said, the decision is big enough that homeowners should consult friends and family members.

Those best suited for the option, he said, are often looking to maintain a certain lifestyle, their investments aren’t performing as well as expected or they are having trouble paying their bills.

It doesn’t appear that the program’s craze has hit the Dubuque area yet, which some real estate experts speculate is because homeowners either are uninformed about the process or simply have a more conservative outlook than those in other parts of the nation.

Brenda Charlson, president of the Dubuque Board of Realtors, said she has referred a handful of people who were candidates for a reverse mortgage on to area lenders, with no results.

“Honestly, no one’s ever taken me up on it,” she said.

Because the FHA bases its data on numbers from regional centers, Pecha said, there aren’t any direct numbers for the Dubuque area.

Still, Iowa’s home equity conversions mortgage program through HUD has steadily increased in recent years, according to Bruce Ray, field office director for HUD.

The program grew from 147 participants in 2004 to 340 in 2007, according to Ray.

Although home-price declines have been a hindrance in some parts of the nation, some in the tri-state area aren’t concerned about the Dubuque market.

“The housing market is stable enough in Dubuque that unless something catastrophic happens, a decline in price would not be the major reason the amount due at the end of the reverse mortgage term would require the entire equity of the home,” said Jeff Hefel, with Ruhl & Ruhl Realtors.

“If you did this two years ago in San Francisco, you could be in trouble now,” he said.

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