Some of the new options that make reverse mortgages more attractive also add a layer of complication. “The myriad of terms, fees and different products make finding the right mortgage an enormous challenge,” Consumers Union said in a recent report.
It helps, of course, to know what you are getting into. Reverse mortgages are loans turned upside down. Your monthly payment is deferred to a future date. When you sell the home it all comes due and it is repaid from remaining equity. It is a transaction that resembles shorting a stock more than it mirrors taking out a traditional home mortgage.
"Financial planners often don’t even understand them because the lessons they have learned (from other financial products) don’t apply,” said Barbara R. Stucki, vice president of home equity Initiatives at the National Council on Aging.
But advisers are now jamming them into their tool boxes. Financial planners who once shunned them as too costly and confusing are starting to see their value – especially as other cash sources dry up for retiring baby boomers.
“A reverse mortgage can be a perfectly good way to use your home equity,” said Stephanie Moulton, an Ohio State University public policy assistant professor and housing finance expert who has worked as a reverse mortgage counselor for American Association of Retired Persons.
“A reverse mortgage can be a perfectly good way to use your home equity,” said Stephanie Moulton, an Ohio State University public policy assistant professor and reverse mortgage expert who has worked a reverse mortgage counselor for American Association of Retired Persons.
“The danger is that boomers might draw down their equity and spend it on the wrong thing, like expensive vacations, and find themselves with none left at age 75 when they need it even more. But if you use reverse mortgages as part of a financial strategy, they can be a sophisticated product that fills a real need.”
How They Work
Reverse mortgages are offered to people who are at least 62 years of age. There are two main types set up under the FHA’s Home Equity Conversion Mortgage, HECM, and referred to by insiders as ‘heck ‘em.’ (The Federal Trade Commission has a reverse mortgage primer on its site.)
The “standard,” or traditional, reverse mortgage, gives you a stream of income for a number of years, usually as long as you live in hour home. They are not cheap. The loan initiation fees are as high or higher than a standard home mortgage, typically $6000 to $8000. As with Social Security, though, there is no “means-testing” or upper income limit. The program can pay thousands of dollars per month on principle of up to $625,000. It is government-guaranteed and not taxable income, and it is not likely to affect Social Security or Medicare benefits. The older you are, the higher the payout.
More people are opting for the new “saver” reverse mortgages. The lite version has shown double digit annual growth among 62-to-64 year olds, according to a Met Life study released earlier this year. They tend to offer much lower monthly payouts. But fees are far lower for the “saver” mortgage and – a feature boomers love – they don’t require a long-term commitment to stay in a home or make other long-term decisions.