Reverse mortgages | Using equity or stealing homes?

A photo of a large house

Many senior citizens are taking out reverse mortgages. Image from Flickr.

A relatively new mortgage product, known as a “reverse mortgage” is gaining popularity. Reverse mortgages are usually targeted to senior citizens. These mortgage products essentially allow a homeowner to get fast cash out of their home, while still living in it for a period of time. Consumer advocates, though, are warning that reverse mortgages may be putting senior citizens into difficult situations.

The basics of reverse mortgage

A reverse mortgage, at its base, is a way for seniors to use the equity they have built up in their home. The bank or reverse-mortgage financier gives the senior a lump sum or several smaller payments in all advance cash. Over time, the debt on the house increases. Once the senior no longer lives in the house, the loan comes due — usually paid by selling the house.

The cost of reverse mortgage

The cost of a reverse mortgage is usually paid in a few different ways. First, the origination and loan fees can often add up to 30 percent or more of the value of the loan. Second, the lien that is placed on the house is usually for much more than the loan amount. For example, one reverse mortgage of $80,000 in cash today required an additional $25,000 in fees. A lien was then placed on the property for $470,000. That full sum must be paid when the senior moves out or dies.

Hidden requirements of reverse mortgages

Many times, individuals who get reverse mortgages end up getting lost in some of the fine print. Most reverse mortgages require that a home be maintained in “selling condition” from the time the fast loan is taken out until the home is returned to the bank. The interest on reverse mortgages is usually also calculated as compounding. In other words, incredibly difficult to pay back.

Upcoming reverse mortgage bust

Some consumer advocates have taken a long look at reverse mortgages, and the conclusions are not promising. The National Consumer Law Center pointed out that reverse mortgages are “eerily similar” to the subprime mortgages that headed up the financial downturn. With more than 100,000 reverse-mortgage homes set to go on the market in the next 10 years, home prices will likely stay extremely low. Reverse mortgages can be incredibly useful for seniors with no other options — but for most, it’s a step in the wrong direction.