Reverse mortgages

Any of you folks have (or had) a reverse mortgage? How do you like it?

The pattern of cash flows makes a lot of sense late in life. But I looked at the actual pricing of the deals on offer recently for an elderly friend, and all the terms I could find are egregious, a complete ripoff. Unless the market becomes a lot more competitive, I’d steer well clear.

Although I realize that the idea of moving home is difficult for many older people, I think you get a far better economic result from selling and either downsizing or renting, and putting the extra cash in low risk investments. Bear in mind that living in your current home until you die might seem attractive, but your future healthcare needs might preclude that anyway. Once you’re in a reverse mortgage, any changes to your plans are just going to accumulate more egregious fees.

Moderator Action

Since the OP is looking for personal experiences and opinions, let’s move this thread to IMHO (from GQ).

Both my grandparents and my parents took out reverse mortgages, and it worked out well for them. That said, if you look at them from a financial sense, they are awful. They’re a bad deal. But IMO that’s a bad way of looking at them. They are more of a lifestyle choice, and in that sense, they allow folks to stay in their homes as they age; that is a HUGE advantage for some folks. I happen to have the type of family who had a lot of equity in their homes, but not a lot of $$ coming in from pensions or retirement funds. If you’re in that boat, it might make sense for you.

There’s a whole pile of threads on reverse mortgages where a lot of folks weigh in with more details - a simple search should dig 'em up.

I am not an expert but the companies that advertise them always struck me as sleazy and exploitative and I have had had friends and acquaintances with elderly relatives who regretted doing them. There is an old financial planning axiom that you “should never borrow money to buy groceries” and that is the definition of a reverse mortgage.

It would seem to me a person in a situation who needs one would probably be better off selling their home and downsizing but I guess that’s easy for me to say since I’m not in the situation.

There’s definitely fly-by-night places that offer reverse mortgages, but they’re also offered by legitimate banks. Just like everything, shop around.

And yeah, once you or a loved one are actually in that situation, things look an awful lot different. Say you have 5 or 10 years of healthy, somewhat active life left in you, and you are living in a home you’ve lived in for years. You really want to give that up because it makes more financial sense to downsize? Happiness is a big factor when you are looking at end-of-life issues.

Another thought: just what are you saving your money for? My Dad makes no bones about “I’m spending my money on what I want now, I feel no compunction to leave my kids any money.” And I fully support that. His money is going towards keeping him happy & comfortable as he ages and can no longer do a lot of the stuff he likes to do.

Again, folks looking at reverse mortgages as a financial decision are doing it wrong. If it’s not something that you’re doing for lifestyle reasons, it’s probably a bad idea.

As someone who has considered a reverse mortgage (along with personal savings, inheritance and SS/medicare as part of his retirement funding methods) can you elaborate on how terrible the terms are?

I won’t need one for at least 25 years, but I’m curious as to how bad of a ripoff they are if anyone knows.

Lets say you have a house that costs $200,000. What kind of terms would you get with that, for how long, what are some fees you’d face? I’m trying to look it up online but having some trouble making sense of the calculators.

What if you are already in a low cost of living house (under 100k)? Is a reverse mortgage worth it then, because you can’t really make a lot of money to reinvest if you move.

The calculators online seem to imply your loan amount is only half the value of your house. Is that correct? Are you selling a home for half its value in a reverse mortgage or am I missing something?

I haven’t looked into a reverse mortgage for myself but I have a personal interest in consumer financial products like these, so I’ve studied them a bit. I’m happy to offer my views.

Some have high interest rates, high up-front fees, and high ongoing service fees. It pays to shop around.

This article from the Federal Trade Commission explains reverse mortgages pretty well.

The terms you can get depend on a lot of factors, including:

  • Your age, and if relevant, your spouse’s age. You are effectively borrowing money against the value of the house. The loan accrues interest each month until it is repaid. The loan may be repaid early but generally, the plan is that it will be repaid only when the house is sold, which, if all goes according to plan, won’t be until you move out of it or you die. The effect of all this is that the older you and your spouse are, the more money you can likely borrow against the value of the home because the underwriting assumption is that you both will die sooner and the loan will be repaid sooner.

  • How you want to be paid. You can elect to receive a one-time payment up front; you can get a certain amount of money each month for the rest of your life (the amount of which will be influenced by your life expectancy); a certain amount of money for a certain period of time (say ten years); or a line of credit, which you can draw from whenever you need money up to the amount of the line of credit.

  • Your ability to pay for all the expenses of the home. You will still owe property taxes, insurance, and maintenance for the house. Your ability to pay those expenses is a credit risk to the lender. If you have good income to cover most of the expenses, you will be a better credit risk and you may be able to borrow a little more money than someone for whom those expenses are a stretch. Being a good credit risk may also get a better interest rate.

  • Interest rates. Interest rates change daily. Like any loan, you are better off getting a lower one.

There are underwriting fees related to a reverse mortgage. For federally-backed mortgages, those underwriting fees are capped at, I believe, $6,000. If you have a $100,000 house, you might typically be able to borrow something like $50,000 (or to get the equivalent in monthly payments over your remaining life). So, if you paid the maximum fees and received a typical reverse mortgage, you would only get about $44,000 after fees. Whether that is worth it is up to you to decide.

When you do a reverse mortgage, you are not actually selling the house. You are taking a weird loan against its value. You don’t make payments on that loan. You may even get regular payments from the bank under the loan terms. The loan is repaid when you die and the house is sold. Depending on the state, the loan can either be non-recourse debt (which means that if the amount due on the loan is worth more than the house, the bank can’t collect the difference from your estate) or recourse debt (meaning the bank can go after your estate to collect any deficiency).

If you were to sell the house today for its full value, you wouldn’t be allowed to live there any more. It should be obvious that no one will pay you the full value of your house today if they have to wait ten or twenty years until you die before they can move in. The bank won’t give you the entire house’s value today either. It’s true that you would get more cash if you sold the house today, but where would you live?

With a reverse mortgage, the idea is that you can get a loan today equal to the present value of your house minus the expected present value of the interest and fees that will accrue on that loan until you die and the loan is repaid. At today’s interest rates and fees, for many people, that works out to an amount equal to something like half the value of the house. Whether the exact amount you can get today is more or less than half the value of your house depends on some of the factors I described above.

Thanks for all your answers! Seems like I’ll have to give this one a lot more thought.

Why would someone have to wait for 10 or 20 years to close a sale? You can cash out your reverse and/or sell at any time, but that might be affected by whether you owe more or less than the property is worth. You don’t get a loan equal to the value of the house. You actually get a very small percentage of the equity in your property. A lot of people don’t really understand the process and make big mistakes in assumptions and how they use their money. I have a reverse mortgage, and it has given me my retirement. Yes it’s an expensive loan, but it’s my money, not my daughter’s, and I am living very happy. I expect to live on it for the next 20 years, with no mortgage payments. I have a very nice SoCal house that I got very lucky with. I could go through the effort to cash out and, [shudder] move. And I could pay cash for a big-ass beautiful home in Arizona or Texas. I’m sure not going to find anything around here, but then I’d have to go live there. [Shudder!] All of the arguments here discuss living happy as opposed to spending too much money to do so. Again, it’s my money. Here’s the deal though. The first mistake people do is spend all the money they get like a game show win. If you still have a good income, maybe you can. But if you forget that you still have to pay taxes and plumbers and roofers, then you’re fucked.

What about mobility after the reverse mortgage? Say you decide you want to move after all. Then what happens regarding the sale of your house?

I was responding to a question asking whether a reverse mortgage is equivalent to selling a house for half its value. It’s not. I tried to explain why you can only borrow a fraction of your home’s value in a reverse mortgage. I’m sorry if my explanation was unclear.

You can sell the house but you have to repay the reverse mortgage at or before the closing. That will include paying the accrued interest since you started to collect the money from the reverse mortgage. You can use proceeds from the sale to repay the mortgage.

Depending on how much you borrowed, how much interest has accrued, the sale price, and the terms of your mortgage, selling the house might net you a lot, a little, nothing, or (rarely) you might even have to write a check to the mortgage company.

For clarity, the simple answer is that a reverse mortgage is just like an ordinary closed mortgage in that respect, but potentially with higher penalties for early termination (with the caveat that specific terms vary among the states and in Canada). Legally it’s nothing more than a lien registered against the title for some amount usually a good bit larger than the mortgage principal, and like any other lien, mortgage, or HELOC, at closing the lawyer has to discharge those obligations before you get the balance of the proceeds. The only difference with a reverse mortgage is that the penalties for early discharge are typically higher than with a normal one, usually on a sliding scale where it may be around a year’s interest before the first year, a percentage less after that, another percentage less after the second year, etc. In general the longer you hold the mortgage the lower the termination penalties, but of course the tradeoff is that the longer you hold it the more interest accrues.

To make a more general comment, financial professionals tend to advise against reverse mortgages for reasons that are obvious if you crunch the numbers. The big reason they’re often characterized as a bad deal is that you’re on the losing side of the most powerful force known to capitalism: compound interest. And the compound interest is exacerbated by relatively high interest rates, typically substantially higher than conventional mortgage rates. But one has to understand that they are only looking at numbers and not at some of the realities of personal situations. The fact that you may theoretically be better off selling, investing in safe money markets, and renting, is often easier said than done. Owning your own home, particularly a familiar one, offers a quality of life that renting often can’t match, as does living in a neighborhood of other homeowners instead of an apartment or a neighborhood of rentals. Rentals can be hard to find, especially for retirees on a limited income, and they can be expensive. And it can be a real challenge to find a place to park your money that generates enough income to substantially cover the cost of rent (after tax, yet) while the interest costs of a reverse mortgage, at least in the initial years and on moderate amounts, might be a tiny faction of what rental costs would be, and involves no relocation at all.

One would think that if reverse mortgages are such a bad deal for the borrower, they must be a terrific deal for the lender. But the interesting thing is that, although the number of reverse mortgages being issued has been growing substantially, there aren’t that many players in the market. I don’t know how many there are in the US right now, but in Canada there is exactly one. That’s it. There is only one bank that does reverse mortgages, and that’s all they do (other than selling GICs – money market investment certificates – which is how they raise the capital to lend). No one else wants to bother with it.

So I think the proper way to characterize it is that it’s a specialty business with its own unique tradeoffs of risks and returns, the major downside to the lender being having to wait many years, possibly decades, before they see a cent of return. Likewise, I think potential borrowers should look at it the same way. It’s a rather unique and unusual step that may be right for some people but not others, and it’s especially important to be aware of the downsides. It may not be a bad decision at all for some, but as Backwater Under_Duck correctly points out, it’s certainly not a windfall of free money.

ETA: The above is based on what I know about reverse mortgages in the Canadian market, and while the basic principles are the same in the US there may be significant differences in the details (for instance, what Tired and Cranky describes as non-recourse debt is the law here; your estate can never be liable for more than the fair market value of the house). I have also heard of a few unscrupulous lenders in the US who have pulled sleazy tactics like foreclosure on flimsy pretexts, but then, so have some regular mortgage lenders, too. The banking industry in Canada is generally better regulated

Is there any real difference between a home-equity loan and a reverse mortgage?

I’m assuming that RMs have a lot of fees and or high interest. You see lot’s of ads for RMs, but the never seem to tell you what the fees are.

Yes, they are very different. A home equity loan is a large amount of money that you borrow and contractually obligate your home as collateral. If you don’t pay off the loan, the lender can sell your home to collect their money. When you do pay off the loan, then the house is yours again. You will receive a lump sum of money and then be required to make payments monthly. Basically, it’s just a mortgage.

A reverse mortgage is essentially selling your house piecemeal but maintaining a right to residency for your life (and possibly the life of your spouse.) You are effectively slowly selling your house every month (or for a single payment) that the loan company collects on when you die via selling off your home and getting their money back. RMs can be dangerous simply because they sound like such a great deal. Their biggest danger is with people who are younger and take lump sums. As you age, you might not want to live in that house anymore and if you don’t have the money to get a new home, you have no equity to cover moving expenses. You can also end up in a situation where the wrong spouse dies first leaving the other one with nothing from the house (though since 2015, they too have a right to residence in the home.)

They are both ways to convert home equity into cash, but their repayment mechanisms are quite different.