Senior moments: Beware of pitfalls of reverse mortgages By Jackie Byrd
A column for seniors and those who love them
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When you get to the end of all the light you know and it's time to step into the darkness of the unknown, faith is knowing that one of two things will happen: Either you will be given something solid to stand on or you will be taught how to fly. - Anonymous
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Last week, the Senior Moments' topic was reverse mortgages. For the most part, we listed advantages of reverse mortgages as a life planning tool on a case-by-case basis.
To recap, there are some people, in some situations, for whom a reverse mortgage is exactly the tool they need to maximize their financial opportunities. Advantages include that most reverse mortgage loans are insured by the Federal Housing Administration, and require counseling to make sure you understand what you're doing when you sign up. The counselor helps the borrower weigh other financial and loan options as well as a reverse mortgage's possible impact on eligibility for federal and state benefits, and how the reverse mortgage might affect the estate left to the borrower's heirs. Other advantages are the flexibility of types of payout, and the fact that a senior may qualify for a reverse mortgage even if they lack the income or credit required by other types of loans.
In order to truly balance out the discussion, it's important to consider possible pitfalls of choosing a reverse mortgage. The first consideration is the cost of this type of loan. Because the costs of a reverse mortgage loan are not due until the borrower dies or moves out, they may not seem totally real. They seem distant and small. However, interest rates on a reverse mortgage loan are usually higher than on comparable home equity loans. And most reverse mortgage interest rates are variable. Other costs include an origination fee, mortgage insurance premiums, closing costs and a monthly service fee. A borrower who ends up only staying in their home for a very short time after taking out the reverse mortgage gets hit hardest by any cost disadvantages of the loan. So if you're thinking about a reverse mortgage, plan to stay in your home for awhile.
Also, a reverse mortgage is usually a one-time transaction. Once you have tapped into your home equity, it is unlikely to be available for future financial needs. That makes it important to use reverse mortgage money to meet urgent financial needs as part of a realistic plan for the future, and not to fund investments or discretionary spending.
With regard to government benefits, such as Supplemental Social Security Income, Medicaid or food stamps, a reverse mortgage is not usually considered income. However, money held for more than a month can affect eligibility for these programs. You should check with benefits providers to ensure that a reverse mortgage would not exclude you from benefits to which you would otherwise be entitled.
Beware of commission-driven sellers who try to get you to use reverse loan proceeds to buy annuities, other insurance products, or securities. In fact, be very wary of anyone who links a reverse mortgage pitch with a push to sell you something else. Make sure, if you are tempted, that you consider not just any potential gains, but the loan costs and tax implications of any investment deal.
Some predators contact seniors offering to refer them to reverse mortgage lenders in exchange for a "small" percentage of the payouts. Watch out. That's like paying something for nothing. HUD's Web sites provide information at www.hud.gov or call 800-569-4287 for referral to a local housing agency.
One thing seniors should definitely consider in thinking about a reverse mortgage is the impact on plans to preserve estates for distribution to heirs. Home equity tapped out by a reverse mortgage will not, of course, be available to pass on.
Finally, you should be sure to consider other financial solutions to whatever situation you are trying to address with a reverse mortgage. Property tax deferrals or reductions are sometimes available to seniors. Rehabilitation loans or grants and utility assistance should be explored. Taking out a different form of loan, or actually selling the house may be a better financial move in some situations. Sound, in-depth counseling on these issues is essential.
While they can be a useful, even a perfect, tool for wise users, reverse mortgages are not for everyone. In fact, very few big decisions of life are the same for everyone. It can be safely said that everyone over the age of 18 needs financial and medical powers of attorney, a living will setting out the treatment you desire at the end of your life, and a way to distribute assets after death, such as a will or trust. Those four things are necessary. Still, everyone's document will be different, based on their desires, goals and current situation.
Thank you for reading. Stay well. See you next week.
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The writer, a longtime resident of Bowie, is secretary of the Maryland/D.C. chapter of the National Academy of Elder Law Attorneys and a member of the Elder Law Section of the Maryland State Bar Association. You can e-mail her at jbyrd@byrdandbyrd.com.
