Reverse Mortgages: too good to be true?
If you decide to get one based on the TV ads, free DVDs, and glossy brochures, they certainly seem too good to be true. In some cases, a reverse mortgage might be a reasonable solution, but I doubt most prospective seniors are aware of the true nature of this type of loan. If you genuinely consider one, think about the following before signing any loan documents.
Some phrases commonly used in marketing reverse mortgages may not mean what you think they do:
a) 100% Tax-Free: How can this be bad? There aren’t many things in life that are truly 100% tax-free. But think about it for a moment. A reverse mortgage is a program that utilizes the equity you’ve built up over the years after paying a regular mortgage loan. You have already paid taxes on the equity you’ve earned, which is why it is considered 100% tax-free. If questioned on why they claim it is 100% tax-free, they will likely describe it as a courtesy, assuming you may not know this. I would call it deceptive, as they neglect to explain why it is tax-free.
b) Government Guaranteed: This phrase can convey a reassuring message to homeowners about the program's safety and how the government protects you as a consumer. The intended inference is, ‘If the government guarantees it, then you are safe because of that guarantee.’ But consider this for a moment. The equity in your home collateralizes the amount used to credit payments you don’t have to make. In essence, when you obtain a reverse mortgage, you are borrowing enough money to first pay off the existing loan on the property. So, who is actually the beneficiary of the government guarantee that they are touting? It can’t be you, as it’s your money that is at stake. You guessed it! The government guarantee is for the lender who pays off your existing loan and then lends you your own money. Since there are some unusual circumstances where the lender faces risk, that risk is mitigated with a government guarantee. So why would a lender boast that the loan is guaranteed by the government? Is it because they think you might be worried about the lender experiencing losses due to your loan? Or are they trying to imply that the government guarantees the transaction to safeguard its citizens?
c) Social Security and Medicare Not Affected: That’s reassuring! But consider this claim. Would your Social Security and Medicare be impacted if you withdrew money from your bank account? Of course not! Your government benefits have nothing to do with any loan you might take out. So why would a lender claim that the loan will not affect your retirement benefits? Is it because they worry you might mistakenly believe your benefits would be negatively impacted, or are they trying to make it sound like a reasonable and safe option?
d) Your Children’s Inheritance: Let’s face it! Most seniors want to provide for their children. So rather than avoid addressing the 900-pound gorilla on the coffee table, why not mention it and get it out of the way? You’ll notice that the first part of the explanation seems like an obvious but minor issue— the part where they note that the loan, the accrued interest, and all the fees charged in securing the loan are paid first. The sentence concludes with the reassuring statement that all remaining equity goes to your heirs. What they don’t mention is how much equity is left for them. If you inquire about it, their response will be something like: that depends on the length of the loan, the interest rate, etc., which varies for each individual. If you are bold enough to ask what the average leftover equity is across the entire population of mortgages they’ve issued, after a long pause, they will likely not have statistics for you. Is it because they are concerned that you might think your leftover equity would go to the lender instead of your heirs, or are they trying to reassure you that your heirs will not be adversely affected?
e) Income and Credit Score Requirements: Oh joy! There are none. Great! A loan with no minimum income requirements. But think about it for a moment. Why would you need income to qualify for a loan essentially funded with your own money? Well, check that! There were no requirements until recently (2015) when the government required your credit history to be evaluated. Why would the government do that? If you have a tax lien against you, that would be paid first. In that case (which they probably didn’t think about when they first came up with the program), the lender would have to be made whole by the government guarantee, and therefore, the government would retain less of its recovery.
f) Encourage Independent Counseling: That seems fair and honest. Is it? They are encouraging you to seek counseling because it is required by the government that you receive counseling. And why is the government requiring counseling? Because there’s been an epidemic of scams surrounding disreputable lenders using deceptive practices to take advantage of you. HUD has warned that it has received reports and concerns that FHA-approved Reverse Mortgage Lenders are steering potential borrowers to specific Home Equity Conversion Mortgage (HECM) counseling agencies, and lenders have been providing advance copies of borrower review questions used by counselors. You should also know that you must pay for that counseling. And, since those fees are to be paid by you through the lender, is there any other indirect compensation tied to that counselor-lender relationship?
That said, a reverse mortgage can still be a valuable tool for you as a senior—depending on your circumstances. For example, if you have no heirs, it allows you to receive cash without selling your home or taking out another loan and making payments on it. You may prefer to have cash backed by your equity so that your retirement can be less stressful.
My only suggestion is to ignore the shiny objects they use to divert your attention. Understand what you are gaining and losing without all those smiling customers who have provided glowing testimonials. Question: if a lender offered you a cash bonus for giving a glowing testimony, would you refuse or would you take the cash? Forewarned is forearmed!
