Photography by Rita Pouppirt
Most of us have seen those convincing TV commercials starring handsome maturing actors whose former fame is meant to make seniors feel comfortable with the benefits of a reverse mortgage. But what is a reverse mortgage exactly? Is it as great as it sounds? There are pros and cons to this type of loan that a 60-second commercial can’t cover.
The main points are well known: Seniors age 62 and older can get an equity cash advance, stay in their homes for the rest of their lives, and no longer have a mortgage. Even so, reverse mortgages are complex, and homeowners considering them need to analyze all the perks and drawbacks.
Beyond my personal experience, I learned that several versions of such a mortgage program came and went over the years, many of them scamming senior citizens. Congressional hearings in the 1980s formalized reverse mortgages under the Home Equity Conversion Mortgage (HECM) program, which is insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development (HUD).
My husband and I entered into a HECM in 2014, when our finances caused us to succumb to the hype about the quick money available. Our experience was far from positive, so my main suggestion to anyone considering this is to be sure to shop around to find out what different lenders offer.
The Cash Advance
We began making wish lists of what we would buy and the bills we would pay off, smiling at the notion that we’d be able to replace one of our ancient cars.
When we learned that the equity advance was going to be in the hundreds instead of the thousands, we laughed — until we realized it wasn’t a joke.
Where was that fat cash advance the handsome actor talked about? Somehow our equity did not seem to matter, given other factors like our age. The lender had many reasons for not giving us a healthy check. I hoped that the line of credit would make up for the disappointing advance. But the dismal line of credit was one more insult. We joked that we should splurge on good pairs of shoes or go to a buffet dinner for two.
Even though you qualify at age 62, bankers are counting on much older people taking out these loans. If you’re approved for a reverse mortgage in your 60s, they know you might live another 25 or 30 years in the house. It doesn’t benefit them to give you huge cash amounts in an advance.
A reverse mortgage also precludes one from taking out any other loans with your house as collateral. So you're stuck with whatever cash the reverse mortgage lender negotiates.
Signing Over the Deed
The next surprise came for me, as the spouse who was under age 62, when I was advised that I would have to sign the deed to our home over to my husband. The loan could not proceed unless I did, and it was an uncomfortable position to be in.
Living in California, a community-property state, I knew that my rights were protected. But what if you don't live in such a state? There are people who could find themselves in a precarious position, having signed over the deed to the other spouse. We put the house back in both our names a few months after the loan closed, which was totally legit.
If you are the spouse under age 62, learn your rights, including whether you get to stay in the home if your spouse predeceases you.
When we reviewed the closing costs, it was another very real shock. You are essentially paying the lender to give you your own money. Plus, it's a further reduction of your equity. More savvy investors would anticipate this if they were familiar with the terms of home equity loans. But this was our first home, so it was new to us. I was critical enough about some line items that the bank reduced the closing costs.
How Our Credit and Debt Affected Our Reverse Mortgage
During the process of going over all of the loan documents, my sizable school loans were brought up. That was no surprise to me. An English degree from the University of California, Los Angeles; going halfway through law school; and financing my son’s college education added up. The occasional deferments and lower adjusted payment plans had accrued alarming amounts of interest over the years.
The lender insisted on a three-way call with the student loan provider to verify my modest income-based repayment plan. Technically my husband was the qualifying senior because of his age. However, my student loans and our other debt all got factored into the final approval of the reverse mortgage. Despite the fact that you will not have a mortgage payment, the lender still wants to ensure that you can meet your other obligations and maintain the house.
Mortgage Insurance and Property Tax
Also be aware that despite the disappearance of the mortgage part of your monthly payment, you as the homeowner still have to pay property taxes and mortgage insurance.
Interest on the Back End
When we got our first statement, it showed how much interest had been racked up in a short time on the back end of our loan. That was when we decided to get out of the reverse mortgage as soon as possible.
Assume that on the day you close — after the lender pays off your mortgage and between any cash advance equity and line of credit — your home is valued at $400,000. Your first statement might read $405,000. One hopes that people do very constructive things with the money that was once spent on the mortgage.
But know that every month, interest is accruing on your reverse mortgage that will be reflected in those monthly statements.
That’s more palatable if you got a fat equity check. But imagine how we felt to have received a pitifully small cash advance that didn't allow us to pay off any bills or buy a newer car.
“We Can Give You More Money”
Our lender contacted us within a year of the closing to say that he felt they could tap into some more of the equity in our home. He estimated that he could get us at least $10,000 or $15,000. I mentioned that I found it strange that this new money was suddenly available just nine months after we closed. His response was nonsensical, and I quickly realized that this new loan would entail another batch of closing costs.
But we started the loan process because by this time, our ancient cars were leaking oil. Midway through the application, the lender hinted that the amount that he first suggested might turn out to be significantly less. Then he started making an issue of my school loan repayment agreement, of which he was very aware, since he had just approved the first loan nine months before. Essentially, the lender wanted to triple my payments. Up was down, and down was up.
The bottom line was that the amount offered to us was much less than the first banker suggested, and the complications over my student loans became insurmountable. The second refinancing attempt ended unsuccessfully.
The Bottom Line: Is a Reverse Mortgage a Good Idea?
Last year, we sold the house. I was glad we did, so we could stop the interest that was piling up.
Yes, a reverse mortgage can work out quite differently for other people and can conceivably help seniors. But remember that your age is a significant factor, as is your credit profile and equity. Be wise. Read the fine print, and don’t be scared to ask a lot of questions.
Davida Siwisa James is featured on our webinar, “Everything You Need to Know to Help Your Aging Parents.” Her book Senior Services for the Financially Challenged can be purchased on Amazon and at Barnes & Noble.