Reverse mortgages: Wise choice for seniors?

The popularity of reverse mortgages is soaring, and for good reason, said Patrick Duffy in the Los Angeles Times. Such loans, available to homeowners age 62 and older, let them tap their home equity without having to meet income requirements, sell their house, or make monthly payments. “With traditional home equity credit lines increasingly difficult to get in a time of declining home values and tight underwriting standards,” a reverse mortgage can be a lifesaver for cash-strapped senior citizens. Payouts can be made in a lump sum, monthly, or via a line of credit, and the loan isn’t due until the homeowners sell or die. Of course, reverse mortgages “do have their limitations.” For one, upfront fees often equal 5 percent of the loan amount. To most homeowners, that means at least $14,000 to $18,000 in initial costs, according to Richard Pittman, director of housing and counseling for ByDesign Financial Solutions. “Take a pause,” Pittman says, “and consider what you’re using the money for.”

Given the complexity of these loans, several factors need to be considered before signing on, said Charles Duhigg in The New York Times. First, are there other alternatives? In many cases owners are better off downsizing to a less expensive home or taking out a more conventional loan. It also matters how long you plan to stay in your current home. Reverse mortgages only make sense if you expect to stay put at least seven years. By the same token, however, the loan amount will grow larger the longer you stay in the home. It’s not possible to owe more than the house is worth, but “the debt can grow to equal the entire value of the house, meaning heirs will not receive anything.”

Some market-watchers fear that widespread adoption of reverse mortgages could further damage the housing market, said Anne Kates Smith in Kiplinger’s Personal Finance. “As the reverse mortgage industry grows, there are ‘eerie parallels’ to the subprime mess roiling the country.” Indeed, senior citizens looking for help from reverse mortgages could be easy prey for misleading marketing or high-pressure sales tactics for investment and insurance products. The National Reverse Mortgage Lenders Association recently has seen “subprime players coming into our market,” warns the association’s president, Peter Bell. But he adds that bad actors are fringe players, not the industry’s main force.

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