Defending the maligned reverse mortgage
Media and government are repeatedly cautioning Americans to be wary of the reverse mortgage, a loan that lets homeowners 62 and older borrow large sums against their home equity.
We even recently published a story examining 4 reasons to be wary of this type of loan, which allows borrowers to use the money how they see fit without any requirement to repay it as long as they live in and maintain their home.
Yes, these loans are complicated and do carry risks. Seniors should be fully educated about how the product works before they sign the paperwork.
But I think this loan can be an effective tool and isn’t necessarily the cause of the poor personal finance decisions for which it's often blamed.
One common criticism, highlighted in a recent congressional report, is that too many borrowers are taking out lump-sum loans (as opposed to ones that offer a monthly payout) and using the proceeds to pay off their existing mortgages.
Reverse Mortgage Opinions
|It's important to understand that a reverse mortgage is a financial product and, like ALL financial products, it's not for everyone. Education, information, and responsible lending are key. -- Sharon|
|As a financial advisor, I occasionally recommend a reverse mortgage to my clients. I generally require that an adult child that they have confidence in be present to help them in their decision. I don't recommend them to younger clients who don't have financial discipline. -- Trish Graham|
|I believe that this type of lending is predatory and those responsible for providing this type of loan should be held accountable. -- Lorenzo Moreno|
|My parents had an RM and let me tell you the loan officer saw them coming! It was probably the WORST deal they ever got themselves into. -- Windjammer||Read more comments on the value of reverse mortgages.|
By using a significant amount of the home’s equity at the beginning of the loan term, seniors face the possibility of running out of cash.
Beth Paterson, executive vice president of the lender Reverse Mortgages SIDAC in St. Paul, Minn., says that while everyone’s situation is different, she generally believes using this type of loan to pay off a conventional mortgage and eliminate the monthly payments can benefit seniors.
"With a mortgage payment, if life happens and then they can’t make the mortgage payments, they are likely to face foreclosure," she says. "With a reverse mortgage, there are no monthly mortgage payments so the risk of foreclosure is reduced."
Getting rid of what may be a senior’s largest monthly expense also frees up money for essentials like food, utilities and health care. In this scenario, the reverse loan is still being used for what critics seem to believe is its intended purpose — taking care of basic living expenses.
It’s just being used indirectly.
Still, it’s true that seniors occasionally use loan proceeds in ways that don’t improve their financial positions, says Letha Sgritta McDowell, a certified elder law attorney with Oast and Taylor in Virginia Beach, Va. She says that some seniors do use the proceeds to make frivolous purchases.
But the risk isn't unique to this type of loan.
"Seniors, or anyone for that matter, can mismanage their money, whether the money is from reverse mortgage proceeds, a conventional mortgage or credit cards," Paterson says.
Paterson also mentions the stories about seniors "squandering" their loan proceeds to take a vacation. She has a different viewpoint.
"Who are we to judge how one spends their money?" she says. "If they have items on their bucket list they want to check off and the reverse mortgage allows them to do this, then why not?"
Paterson writes on Beth’s Reverse Mortgage Blog that it's important to be financially responsible, but we can't live our lives saving all our money for a worst-case scenario, regardless of how old we are.
Another risk is losing one's home for nonpayment of property taxes or homeowners insurance premiums.
But, again, this risk isn't unique to reverse mortgages.
You will face foreclosure under any mortgage if you don’t pay property taxes or insurance.
And even without a mortgage, you can lose your home to the tax authorities if you don’t pay your property and income taxes.
Reverse mortgages are complex, and like any financial product, they have risks.
The same could be said of stocks, but almost any financial expert will tell you that investing in stocks is essential to earning a high enough return to retire.
Perhaps these loans could be simplified in the way that mutual funds and exchange-traded funds have simplified and eliminated some of the risk of stock investing.
But risk and complexity make a flimsy argument for keeping seniors away from these loans altogether.