Reverse Mortgages Allow Select Homeowners to Borrow Against Home Value
President Barack Obama’s budget includes an $800 million request to fund a government-backed reverse mortgage program through the Federal Housing Administration. At a minimum, the taxpayer subsidy means that costs won’t be rising on reverse mortgages, and that the government plans to make sure there’s still a liquid market for the loans.
Reverse mortgages allow homeowners aged 62 and up to borrow against their home’s value. The loan is paid back with interest when the homeowner sells the property or dies. These mortgages boomed as home prices hit new highs earlier this decade, but the market for those loans has largely disappeared now as home prices have fallen, leaving the FHA as one of the last sources for reverse mortgages.
The FHA insures loans against losses, but doesn’t make any loans. That means that if the agency guarantees a $250,000 reverse mortgage, known as a Home Equity Conversion Mortgage, and the home’s value has fallen to $225,000 when the borrower dies, the government covers the shortfall to the lender. The FHA collects insurance premiums from borrowers to provide that coverage.
Does it make sense to get a reverse mortgage? That depends.
Brokers say the program makes sense for cash-poor, but house-rich seniors who have exhausted their retirement savings, but have significant equity in their homes. But the AARP cautions that reverse mortgages should be done only as a last resort, after other alternatives have been exhausted. The reason: the mortgages are expensive, not only in terms of upfront costs and fees, but also when considering accrued interest and insurance premiums paid over the life of the loan.
Financial advisers are also skeptical of the benefits because the size of the loan after 10 or 20 years could be far greater than the cash received by the borrower. “This type of loan is only appropriate for those seniors that desperately need cash,” writes one financial adviser.
The expense of the loan may not matter to many seniors because they’re getting paid while they live in the home, and the payback doesn’t happen until they’ve moved or died. But a reverse mortgage could take a big bite out of the money borrowers collect when they sell their house or out of any estate they leave behind to their heirs.
Also, it’s important to consider what will happen if the borrower has to move out of the home unexpectedly to a retirement home or assisted living center. The borrower has to sell the home if they fail to live in it for more than a year, if they fail to pay property taxes and insurance, or if they fail to maintain upkeep of the property.
Lawmakers and regulators, meanwhile, are concerned more seniors are being sold the mortgages by vendors who are aggressively marketing ancillary investment products that could be unnecessary or risky.
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