Bank Rate on Reverse Mortgages

NewImage.jpgBank Rate takes a look at reverse morgages and the tradeoffs that come along with the loans.

The loan can help borrowers generate cash flow, pay expenses, and achieve financial and estate planning objectives. Those goals are all “legitimate, if done wisely,” says Barbara Stucki, vice president of home equity initiatives at the National Council on Aging, a nonprofit advocacy and service organization for older Americans based in Washington, D.C.

On the minus side, these loans aren’t appropriate for every borrower or situation. Nor are they the free money they might appear to be. In fact, the upfront fees, mortgage insurance costs and deferred interest on a reverse mortgage can add up to a sizable sum.

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Don’t borrow more than you need. Seniors may be tempted to take out a reverse mortgage for peace-of-mind purposes, but a lump sum in a bank account won’t generate enough income to offset the loan’s deferred interest expense, says Susanna Montezemolo, vice president of federal affairs at the Center for Responsible Lending in Washington, D.C.

“For the majority of people, it makes more sense to take out a minimum amount upfront, and then have access to a line of credit. They will owe less in interest over time,” she says.

Reverse mortgage entails trade-offs

 

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  • It is interesting to read what the senior advocates counsel in this article. The advice is of limited value and pertains primarily to those seniors they claim to represent which is far less than the whole population of senior homeowners eligible for reverse mortgages.

    For example, one says: “Seniors who won’t be able to afford their property tax, homeowners insurance and home repair and maintenance expenses even with the extra money shouldn’t use a reverse mortgage as a short-term solution.”

    While the statement would be more accurate if “long-term” replaced “short-term,” it is not clear that the conclusion as stated is necessarily correct. Many questions have to be answered, such as what does “short-term” mean and what does “afford” mean? While it is right to question the appropriateness of any loan including a reverse mortgage as a financial solution for any period of time, promulgation of dogmatic rules with no information about specific facts and circumstances is not only unreasonable but it is also irresponsible when it comes to providing financial advice.

    As a CPA I have come across many cases where monies are needed for a short period of time and the cost of a reverse mortgage would be far less than the cost of not getting that money or raising it in a way the seniors actually “cannot afford.” In some cases the monies are only needed for a matter of months but in between the borrowers are not be able to pay real estate taxes, insurance, home maintenance, etc.; however, based on the source of subsequent funds, such problems should go away in a matter of months. After the current crisis, the benefits of maintaining a small balance due in the reverse mortgage, specifically open end reverse mortgages, for use in case of future such cash emergencies, would have been valuable.

    Then one reads: “On the plus side, this type of loan can help borrowers generate cash flow, pay expenses, set aside a nest egg or achieve financial and estate planning objectives. Those goals are all ‘legitimate, if done wisely,’….” While this sounds rational and reasonable, it only sounds so. Whose “wise” standard is being referenced and in what point in time is that standard being applied (after the loan terminates)? Is it right to use a reverse mortgage to take a trip or remodel a kitchen? It all depends on the facts and the circumstances of why loan proceeds were needed to pay for such costs at that particular time. I have seen situations where it is absolutely wise and appropriate.

    When disputing the findings of one of the advocates a few months ago, the advocate rebuked me with the statement that her clients had homes worth $200,000 not $2,000,000 and almost no income but Social Security income. While her rule would have been an appropriate response if the only seniors eligible for reverse mortgages were the seniors this advocate described, the fact is they are not. Much of the information in this article is OK but much is not only opinionated but also terribly bias. These advocates rarely refine their statements to encompass only those seniors they are allegedly addressing. The advocates certainly are not used to having their statements challenged but these kinds of statements not only should be but also must be challenged particularly with the advent of Savers (and hopefully once again proprietary reverse mortgages).

  • Great points Mr Veale, when I first got into this biz years ago my mentor gave me several bits of great/sage advice. One of them in particular when challenged with the fees being too high was the response, “compared to what?” Unfortunately there was never a concrete answer to his retort.

    What these articles almost never seem to do is talk with actual borrowers that have put a RM to use when all the wise advice couldn’t provide a suitable enough solution.

  • It does seem that some senior advocates make claims that are slanted with total impunity. There is little question that their financial credentials should be questioned. Their positions should be contested when they go afield of the senior homeowner population as a whole even if their claims are appropriate for a segment but not the entire population. Their limited experiences and areas of concern should not dictate a market.

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