Fred Thompson, Robert Wagner and Henry Winkler all promote them on TV as a way to help seniors enjoy a better retirement. But recent media attention has focused on a number of abuses in the reverse mortgage industry, raising questions about the appropriateness of this particular financial tool. As is often the case, the answer depends upon the circumstances. But used wisely, this arrangement can help retirees realize a more secure and comfortable retirement.
The key is a complete understanding of the benefits as well as potential pitfalls.
A reverse mortgage is effectively a home equity loan with a twist. Homeowners who qualify can borrow against a significant proportion of their home equity to spend today, but are not required to repay the loan until their death or until they choose to sell the property. Technically referred to as Home Equity Conversion Mortgages (HECM), these loans are regulated by the U.S. government through the FHA. To qualify, all borrowers must be at least 62 years of age and have a specified amount of equity in the home. Furthermore, there must be no other loans outstanding against the home (or the borrower must use proceeds of the HECM to pay off any outstanding loans).
Regrettably, media reports have recently highlighted a relatively small number of unfortunate reverse mortgage disasters, most of which are traceable to poor decisions or lack of understanding on the part of borrowers.
The most commonly reported complaint is the eviction of a surviving spouse upon the death of the primary borrower. Although this is rare, such an outcome is entirely avoidable with a clear understanding of the basic terms of the loan.