Canada's Condominium Magazine

The reverse mortgage: approach with caution

Suddenly reverse mortgages are being talked about again. The reverse mortgage is one of those products that seems to create a lot of confusion among consumers, if not controversy. Just consider the headlines on a couple of recent stories—“Love them or loathe them, reverse mortgages have a place” from the New York Times; “Why Financial Advisers Still Hate Reverse Mortgages” from Bloomberg, and “Five Reasons to Avoid a Reverse Mortgage” from US News & World Report. Headlines like these do not appear to be designed to win converts or inspire confidence. They couldn’t be less like the advertising slogans for the product, which are all about attractive seniors and their dreams and goals and accomplishments.

The Bloomberg piece compares reverse mortgages to a car’s airbags: useful, but only when you’re in serious trouble. It notes that the number of people actually taking out reverse mortgages in the US is down from the peak of 2009, one reason being that the loans are seen as a “last resort” that can “handcuff” homeowners.

Canada Mortgage and Housing Corporation warns that while reverse mortgages have benefits, “they are relatively expensive and can deplete the equity available in the house. This could possibly leave those needing to sell without the resources to obtain alternative accommodation . . . Substantial fees can be incurred at the outset. Furthermore, the interest rates charged are higher than the standard mortgage.”

Wide gap between marketing and consumer advocates’ messaging

The usual marketing message for reverse mortgages, which are only available to seniors, is a pitch for independence. Don’t get caught in a cash pinch: use the equity you’ve built in your home to do the things you want to do—travel, have fun, fix the roof.

Consider a reverse mortgage an option of last resort. If you or your aging parent gets charmed by the TV ads, get advice from a competent financial planner and elder law attorney before doing anything.  Recognize that your aging loved one might not be in perfect health to the end of her days and that care at home might cost more than a reverse mortgage could cover, especially over a period of years. There just might be less costly, smarter ways to deal with the need for money when funds run low.

agingparents.com

Impartial sources like government and consumer protection groups are quick to point out, however, that no one should consider taking a reverse mortgage without first consulting someone in a position to give sound, objective financial advice. This does not include those who are selling reverse mortgages. All of these sources stress that a reverse mortgage should be considered only if there are no better options available.

This is the very first tip given by the office of the Attorney General of the State of Minnesota, for example: Consider your other options.

This very useful, very cautionary set of tips is mostly in the form of warnings, showing how potentially risky a reverse mortgage can be, particularly given that the target market for this product is seniors.

  • Consider your other options
  • Understand the product
  • Beware of sales gimmicks
  • Beware of fear tactics
  • Beware of people who charge you to find a mortgage
  • Get legitimate help
  • Slow down

The Consumer Finance Protection Bureau takes a similar approach, suggesting a number of questions a person should look hard at before getting into a reverse mortgage:

  • Is there a cheaper way to achieve your financial goals?
  • Do you have children or other heirs to whom you plan to leave your home?
  • Do you need to tap into the home’s equity now or should you wait for an emergency?
  • Do you have other assets?
  • How will you pay your property taxes and insurance?
  • Does your spouse want to stay in the home if you die?
  • Talk to a government-approved housing counselor

Others emphasize the downsides of the reverse mortgage, including the fact that there is a real possibility that the homeowner will use up all of the equity in the home and have nothing to leave to heirs. The advocacy group agingparents.com is especially stern about the dangers to seniors of the reverse mortgage trap. The risks of reverse mortgages to seniors are taken so seriously by some that they were the subject of a panel discussion at a San Francisco conference on elder abuse.

In some cases, the reverse mortgage does work out. The Bloomberg piece gives the example of a widow who took out a reverse mortgage while in her fifties, lived happily in her home, then died of illness, still in her home, in her sixties. This woman, a sort of  poster widow for the reverse mortgage industry, was able to stay in her home, there were no issues with children and inheritances, and she could afford round-the-clock care in her illness.

The main point remains, however, that people need to be careful. An attorney for the Consumers’ Union of the United States says, “Consider a reverse mortgage an option of last resort. If you or your aging parent gets charmed by the TV ads, get advice from a competent financial planner and elder law attorney before doing anything.”

 

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