WASHINGTON (Reuters) - The typical reverse mortgage borrower isn’t who you think she is. Instead of the elderly woman you may be picturing, think of a married couple who is a bit younger.
New reverse mortgage applicants tend to be clustered around ages 62 and 63, according to Peter Bell, president of the National Reverse Mortgage Lenders Association. And they are as likely to be couples as singletons.
That’s a change from 15 years ago, when the recently widowed 75-year-old woman was their most common applicant.
In a typical reverse mortgage arrangement, a homeowner will borrow money against the equity in his home, but not have to make any payments on it until the home is sold.
The new younger borrowers often pay off these loans more quickly than the elderly borrowers of yore. They use them as a transitional way to fund retirement, says Bell — living off of reverse mortgage income during the early retirements and then selling their homes, paying off loans and downsizing later.
That may make sense for a boomer generation that is said to hold half of its net worth in home equity. But it can also be a costly strategy and one laden with upfront fees and complexities.
The newly created Consumer Financial Protection Bureau is studying the risks of reverse mortgages and the AARP has filed lawsuits claiming bad behavior on the part of lenders and federal agencies in the way they have administered reverse mortgages.
“My observation is that you have to be very, very, very careful with a reverse mortgage,” says Susan Fulton, a Bethesda, Maryland, fee-only financial adviser. “Before you take one out, get at least two opinions from experts who can look it over.”
Jean Constantine-Davis, the attorney who has pressed litigation on these mortgages for the AARP, doesn’t think they are always a bad idea. “I’m not down on the product,” she says. “I just think it’s a product for a very narrow group of people.”
If you think you might be in that narrow group, here are some considerations.
-- Look at the numbers. Bell's group offers a full-featured reverse mortgage calculator at www.reversemortgage.org. Put in your zip code, age and home value, and you will be able to see how much you can borrow AND how much it will cost you.
For example, a 62-year-old with a $500,000 Maryland house could borrow as much as $306,323 at a variable rate starting at 3.99 percent. But it would cost as much as $27,701 in up-front closing costs and reverse mortgage insurance. Note that the vast majority of reverse mortgages are part of the Home Equity Conversion Mortgage (HECM) program guaranteed by the federal government, and while some lenders may charge somewhat more or less than others, some of the fees are established by HUD.
— Think very long term. Obviously, if you’re going to spend that much money upfront to nail down one of these loans, you need to make sure you’re going to use it for a long time. If you end up selling the home a year later, you will have paid an effective interest rate that is more than 10 percent. The longer you’re in the loan, the less costly those upfront fees will be.
— Weigh the choices. That same borrower could pay less up front if she were willing to borrow less and take a so-called HECM Saver loan. You can also opt for a fixed-rate reverse mortgage, which could protect you if you expect to hold it for many years and rates rise. But it could end up being expensive, because in the typical reverse mortgage, you don’t have to tap all of the money at once, but if it’s a fixed rate loan, you do have to borrow the full amount when you take the loan.
— Don’t go solo if you’re married. Most of the problems Constantine-Davis has seen involve older couples where the lender convinced the borrower to remove the younger spouse from the home deed and therefore, the loan. That enables the borrower to get more cash out of the house, but also makes the loan become due when that borrowing spouse dies. It can leave the second spouse in the lurch. It’s safer to make sure both homeowners are on the deed.
— Look at other alternatives. If you have home equity and are not squeezed to the max, consider a regular home equity line of credit first, suggests Fulton. You’ll have to make payments, but you will have extra cash available for home repairs and emergencies, typically at lower rates and costs, than you will with a reverse loan. She tells strapped retirees that they are better off selling their home, pulling out their equity and downsizing than hanging onto a home they cannot afford. When you have a reverse mortgage, you still have to make sure you have enough cash to keep up with the real estate taxes or home insurance.
— Don’t take a reverse loan just to invest money. Some folks have been talked into borrowing against their homes just to hand money to an unscrupulous salesperson pushing expensive annuities. It’s rarely a good idea to pull money out of your house at comparatively high costs, just to buy another financial product. If the same person that’s peddling the loan is also telling you what to do with the proceeds, beware.
(The Personal Finance column appears weekly. Linda Stern can be reached at linda.stern(at)thomsonreuters.com)
Editing by Maureen Bavdek