Are Reverse Mortgages Creating a New Housing Crisis?
One of the fastest growing trends among seniors is reverse mortgages. This is because these loans give seniors a chance to access their home equity without having income or meeting other credit qualifications for a traditional loan. In fact, most seniors aged 62 or older qualify for a reverse mortgage if they live in their home and have equity.
In a reverse mortgage, homeowners can borrow against equity by taking out cash in a lump sum, monthly payments, or as a line of credit. When used wisely, these loans allow older homeowners to use the value of their home without selling and moving.
Still, reverse mortgages are not problem-free. Critics of the program argue the upfront fees are too high and seniors are forced to pay extremely high interest, with terms that are too complicated for the average person to understand. Borrowers must also pay insurance and property taxes on the home and keep up maintenance, or risk losing the home.
If only one spouse is old enough to qualify for the reverse mortgage, the other spouse must be removed from the deed. Many couples have been foreclosed on when the spouse listed on the deed dies or moves to a nursing facility.
Among the other risks? Fewer assets to pass on to heirs. The pitfalls of reverse mortgages pass to heirs, who must navigate a bureaucratic maze after their parents die to get information on how to keep the family home. There is no data on how many heirs are now facing foreclosure due to reverse mortgages, but it is estimated at tens of thousands.
Reverse mortgages are often depicted as the only option available for seniors who are struggling. Promotions often stress that reverse mortgages do not require any payments until the borrower dies or moves.
According to Inside Mortgage Finance, more than $15.3 billion in reverse mortgages was taken out in 2013, a 20% increase from the previous year. A record $30 billion in reverse mortgages was taken out in 2009 at the height of the housing bust and recession.
With 77 million Baby Boomers set to retire and only 18% confident in their financial ability to do so, many experts believe reverse mortgages will see a boom in the years to come.
The Federal Housing Administration (FHA) guarantees reverse mortgages, but these loans do cost the agency money. Over the life of the loan, interest adds up quickly. Eventually, the value of the home is not enough to cover the debt, which leads to losses for the agency. 13% of outstanding reverse mortgages are underwater, and the federal insurance fund must cover the costs when a home sells for less than the debt.
While reverse mortgages can be an excellent option for some seniors who understand the risks, they can do more harm than good. Seniors who cannot afford their home anymore, for example, will only delay the loss through a reverse mortgage and be left with no assets at all.