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Reverse Mortgages: Safe at H.O.M.E.
By Len Raymond
Reverse mortgages are being touted as an easy answer to the income problems many seniors face as they age. On the surface, these mortgages can seem very appealing.
But seniors should think twice before signing on the dotted line. Signing up for a reverse mortgage not only means signing away the equity in your home; it could also mean eliminating financial flexibility you may need later in life.
These mortgages are exploding in number, because they are heavily marketed and very profitable. In the past, reverse mortgages were sold as a way to solve the very serious issues of paying medical and utility bills and necessary home improvements.
Today, they are sometimes sold for lifestyle enhancements such as fancy vacations and expensive cars. When used in this way, reverse mortgages often fail to take into account the elder’s long term living concerns.
As with a traditional mortgage, the amount of a reverse mortgage is based on the value of the home. However, instead of you making payments to the financial institution, the payments come to you. Up front costs are very steep though, averaging $16,000 in the Boston area. Monthly servicing fees and mortgage insurance are charged on top of the standard rate. Another consumer drawback is that all reverse mortgages use compounding interest, which grows very rapidly. Finally, reverse mortgages are usually variable in rate, meaning the interest can rise over time, which can accelerate the depletion of equity.
All of these drawbacks add up to a loan that can be extremely costly.
Homeowner Options for Seniors (H.O.M.E.), a 24-year-old consumer protection agency, Massachusetts has assisted thousands of people in finding the best and least expensive solutions available. Considered a national model, H.O.M.E. provides in-home counseling, where they review multiple options with seniors and steer clear of loans whenever possible. H.O.M.E. meets with people 60 and older of modest means to determine their current financial situation. They then develop both an immediate plan and a long-term plan. They call the process “remainder of life planning.” During the process they explore tax abatements and exemptions, home repair grants, low cost deferred loans, prescription assistance and much more.
H.O.M.E.’s working model seeks to preserve the equity of elder homeowners, viewing reverse mortgages, along with other loans as a last resort. H.O.M.E.’s menu of options available to seniors is continually evolving. Currently, that menu includes solutions such as the first-in-the-nation Senior Equity Line Of Credit (S.E.L.O.C.) as well as a term reverse mortgage, the nation’s least costly elder equity conversion, which ensures that seniors will not use more than 68% of their equity.
For seniors who need money for one-time expenditures such as home improvements, or who need occasional assistance, the S.E.L.O.C. can be the answer because the elder can take money out when it is needed. For others who need additional monthly support, it may make more sense to consider a term reverse mortgage.
H.O.M.E.’s term reverse mortgage offers a fixed interest rate for a fixed period of time and funds are only available for genuine needs, not lifestyle enhancements. This loan requires extensive counseling and planning for what will happen when the term ends. To protect consumers, H.O.M.E. works with lawyers who offer their services on a sliding scale, often securing no cost or pro-bono services for their clients. Term reverse mortgages have no mortgage insurance fees or additional costs.
H.O.M.E. encourages seniors to make sure they’re dealing with a government chartered or licensed lender that offers a reverse mortgage plan approved by the Massachusetts Division of Banks. Plus, the law requires that seniors be counseled by a state-approved non-profit counseling agency. And, of course, seniors should be sure they fully understand not just the costs and how it all works, but the impacts well down the loan term, not just at the beginning. Seniors have options they may not even realize: property tax relief, supplemental social security income, fuel assistance, utility discounts, and home repair assistance. When these have been exhausted, there are potential loan options. The key is to select the best one depending on each individual’s circumstances and long-term plan.
Reverse mortgages are very complicated, very expensive, and equity depleting. There are less costly alternatives for most seniors.
Len Raymond is Founder and Chief Operating Officer, H.O.M.E. (Homeowner Options for Massachusetts Seniors).