You’ve probably seen the commercials on TV. Celebrities such as Robert Wagner endorsing them as the best thing since sliced bread. In light of the tanking economy, reverse mortgages, or at least ads for them, seem to be all the rage – promising financial help for seniors.
But what are the real details, and risks, of this emerging trend?
A reverse mortgage is a loan for senior homeowners, which uses a portion of the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately six months to repay the balance of the reverse mortgage or sell the home to pay off the balance. The estate inherits all remaining equity. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.
If that sounds too good to be true, it’s important to note that there are conditions and caveats.
“Like a lot of financial services offered, when used correctly, it can make sense in the right situation,” says Stephen Plaisance, executive vice president and chief operating officer for Arvest Bank.
“However, these are highly specialized offerings that are not commonplace to find. Many lenders simply do not offer it, and it does have strings attached.”
Those strings include up-front costs, which are the most common target of reverse mortgage scrutiny. According to Plaisance, the government has tried to improve on the costs associated with a reverse mortgage, but it still has a reputation for its expense.
It is also quite possibly the only loan program where you have to be a certain age to qualify: 62. Consequently, the profile of the customer automatically rings the bells of “taking advantage” of the elderly and other predatory lending concerns.
Plaisance recommends seniors considering a reverse mortgage get their family involved.
Arvest, like many other lenders in the area, does not offer reverse mortgages at this time.
“At Arvest, we have explored offering this product, but since we are so interested in making sure we can be as much of the process, of the loan sale, we have been unsuccessful in offering it,” says Plaisance. “It requires a great deal of specialization which we simply do not have at this time. Plus, this is a highly sensitive loan product, and we would only want to do it the right way, ensuring we take care of our customers.”
Still, for some, and if used correctly, a reverse mortgage can be a useful tool, according to Gentra Abbey Sorem, an attorney with Conner & Winters.
“The reverse mortgage is a good resource for persons who need to supplement a fixed income or need a lump sum for medical or other extraordinary expenses and do not wish to leave their home,” says Sorem. “No repayment is required to the bank until the borrower dies, moves away or the borrower fails to maintain the residence (i.e., repair, pay insurance premiums and ad valorem taxes).”
However, Sorem warns borrowers of potential pitfalls.
“The borrower may die or have to move into a nursing home within a few years or months after making the loan,” says Sorem. “And generally there is no equity or residence to leave to heirs because the outstanding balance will equal or exceed the value of the home.”