Experts: Consider pitfalls carefully before taking on a reverse mortgage
Cash-strapped baby boomers entering their retirement years might look to generate additional income by using a reverse mortgage to tap into their home equity.
Reverse mortgages are attractive to some people because they don't have to make payments to the bank and can continue to live in their home. But the loans have drawbacks, such as high fees, and experts say they need to be considered carefully as a retirement funding tool, especially if seniors want to pass along a home to their heirs.
Reverse mortgages allow older people to borrow against a portion of the equity. Borrowers, who must be 62 or older to qualify, can receive monthly payments, a line of credit or a lump sum and don't have to make any payments as long as they live in the home.
But owners are required to pay property taxes and insurance and keep up with maintenance. The loan must be repaid when the borrower dies, moves or hasn't lived in the home for 12 months — typically by selling the home.
The most popular reverse mortgages, known as Home Equity Conversion Mortgages, account for less than 2 percent of the total mortgage market and are federally insured. There were about 615,000 federally insured reverse mortgages outstanding as of last year, according to government data. By comparison, there are more than 50 million outstanding traditional mortgages.
Lori Trawinski, director of banking and finance at the AARP Public Policy Institute in Washington, D.C., said reverse mortgages were more popular in the 2000s before the housing bubble burst and eroded home values.
The loans picked up a negative reputation because some borrowers opted for a lump-sum payment, spent the money and then couldn't afford to cover costs associated with their homes, she said.
“A lot of people were having trouble paying homeowners (insurance) and property taxes,” she said, and ending up losing their homes in foreclosure.
To prevent those problems, the Federal Housing Authority in 2014 began requiring financial counseling for applicants and stricter reviews of their finances to make sure homeowners can keep up with expenses. The FHA last month proposed rules to strengthen those protections, including requiring that counseling takes place before the loan closes.
“As we grow older as a nation, we have a responsibility to ensure reverse mortgages remain a safe, secure and sustainable financial option for future generations of senior homeowners,” Ed Golding, principal deputy assistant secretary at the Department of Housing and Urban Development, said in a statement.
Borrowers can access a percentage of their home's equity, depending on age, where they live and interest rates. Generally, the older the borrower, the more he can receive.
Peter Bell, president of the National Reverse Mortgage Lenders Association, said the industry expects to see “significant growth in the years ahead” in the reverse mortgage market as larger numbers of Americans retire.
Bell said the loans are increasingly being promoted as a tool to help retirees preserve savings when they have major expenses, such as medical bills or home renovations.
“Retirees typically have peaks and troughs in their cash needs and could be forced to liquidate assets at inopportune times, like when the stock market is down,” he said. “If you use the reverse mortgage line of credit, you take money out and allow other assets to remain intact and grow.”
Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or firstname.lastname@example.org.