Reverse Mortgage Loan Blog

Homeowners turning to reverse mortgages must consider costs and possible scamsnances 

You could call it a reversal of fortune.

But its official government-given name is Home Equity Conversion Mortgage.

And if you are a baby boomer and own your home, you might have already heard about reverse mortgages.

If not, chances are you soon will.

With the economy in crisis, unemployment rising and 401(k) plans gutted from sea to shining sea, a reverse mortgage could be an alternative for homeowners 62 or older who need cash, but don’t want to sell their homes to get it.

Seniors who want to tap the equity in their homes typically have three options: 1) Sell their house and downsize; 2) Take out a home equity loan; 3) Consider a reverse mortgage.

Convert equity to cash

Like a home equity loan, a reverse mortgage allows you to convert your equity to cash that you can use for any purpose. Unlike other home loans, however, reverse mortgage homeowners make no interest or principal payments during the life of loan. The loan only becomes due when you die, sell your home to move, or do not occupy your home for more than 12 months.

And because reverse mortgages are “non-recourse loans,” the worst that will happen is that you or your heirs will receive nothing from the sale of your house, no matter how far its value has fallen. The lenders can not go after any other assets that you or your heirs own.

Despite these protections, there is a dark side to reverse mortgages.

As more Americans approach retirement age, and financial pressures increase, some lenders are taking direct aim at vulnerable seniors, aggressively marketing reverse mortgages as an easy cure-all for their financial ills.

‘Worked out real well’

While reverse mortgages may be right for some seniors, like East Hill resident William Wilson, for others it is a costly endeavor, rife with fees and high up-front costs that can jeopardize financial futures.

“Five years ago, when I was 88, I had a small mortgage on my home,” Wilson said. “I took out a reverse mortgage to pay off that small balance, and still wound up with $50,000. It’s worked out real well for me.”

So well, in fact, that the 93-year-old Wilson has taken a second reverse mortgage to extract more of the equity he has remaining in his home.

The experience with reverse mortgages has been mostly positive, Wilson says, but he has been subject to some aggressive marketing by lenders who want his business.

“I’ve had several brokers from out of town calling me,” Wilson said. “They get your name off mortgage public records, and if they think you’re old enough they will call you.”

And those unsolicited phone calls to Florida seniors are increasing and of great concern to Douglas Beach, the state’s secretary of Elder Affairs.

In 2007, Florida recorded 28,990 reverse mortgages, second only to California’s 72,566, according to government data. This year’s totals are expected to easily exceed 2007.

“We are fielding more calls from seniors about reverse mortgages,” he said, “and we’re seeing more seniors getting into reverse mortgages to make ends meet. And unfortunately, they are not always the right kind of reverse mortgages.

“Our biggest risk now is financial scams,” he noted. “Sometimes seniors are going into reverse mortgages with the first person who knocks on the front door, or calls them up and make a nice pitch.”

Contact the BBB

Beach’s department is working closely with state and local organizations, like the Department of Financial Affairs’s Safe Guard Our Seniors Taskforce, the AARP, Pensacola’s Council on Aging and the local Better Business Bureau, to safeguard seniors from predatory lenders.

And while Pensacola’s BBB has had no complaints about reverse mortgage scams, spokeswoman Karen Szulczewski urges seniors considering a reverse mortgage to contact her organization to ensure they are dealing with a reputable mortgage company.

With home sales in a deep slump, many lenders are looking for new business, and reverse mortgages are where the action is.

Sticker shock

“Mortgage brokers are pushing reverse mortgages to get their 2 percent,” Pensacola banker DeeDee Rhodes said. “They are out beating the streets, advertising like crazy because their regular mortgage business has fallen off.”

Reverse mortgages can be a lifeline for many seniors, but they do come with some serious sticker shock.

“The downside to reverse mortgages is the closing costs,” Rhodes said. “For example, closing costs on a $100,000 loan will be in range of $5,000 up front (since) FHA loans require mortgage insurance. With a conventional mortgage this cost is factored into the monthly payments, but with reverse mortgages it’s paid up front.”

What’s more, Rhodes says the lender – or loan originator – will get a 2 percent fee, and on top of that the costs of title insurance, appraisals and documentary stamps (a state tax on the transaction) all add up to a sizeable chuck of the loan amount cut out of the total going to the homeowner.

The high costs of processing reverse mortgage loans, however, did not deter Milton resident Theresa James.

She recently helped her father and mother-in-law set up reverse mortgages to ease their financial pressures.

“After my mother passed away, my father was left with major medical bills and funeral expenses,” James said.

“And he was facing other financial issues, including loss of my mother’s Social Security income and declining stock market values.”

For seniors, and families of seniors like James’, a reverse mortgage can be helpful, especially in the event of a sudden financial crisis.

Reverse mortgages typically can be processed in about 45 days.

A lifesaver

Though still a small percentage of the home equity lending market, the popularity of reverse mortgages is expected to increase as the baby boom generation enters its 60s and the nation’s economic hard times continue.

Despite the pitfalls, costs and caveats of reverse mortgages, for the James family it has been a lifesaver.

“I can’t think of anything negative to say about our experiences with reverse mortgages,” James said. “It’s been a good thing for my family, a good thing for my father and a good thing for my mother-in-law. And I’ve had no discomfort with it at any level.”

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