Mar 14, 2008

Reverse Mortgages: Proceed With Caution

Reverse mortgage picture

If you're a senior citizen with a valuable house, a scarcity of cash, and a low income, you're likely to have been approached by a salesman for a reverse mortgage. Reverse mortgages are aptly named: Loans are made based on the equity in your home -- you receive cash now and the loan is paid off, with interest, only when the house is sold or you move out (often after your death). A recent New York Times article reports that there's now a $20-billion-a-year industry in reverse mortgages, with "elderly homeowners taking out more than 132,000 such loans in 2007, an increase of more than 270 percent from two years earlier." While reverse mortgages can offer financial security to seniors otherwise unable to qualify for a traditional second mortgage or to find any other source of cash, they tend to be expensive and are often sold with high-pressure tactics. One woman, profiled in the Times' article, borrowed $218,900 against the value of her home, and received only $33,000 in cash. She disbursed the rest of the loan into complex investments that made it difficult to get her money back (and probably generated large commissions for others.) And if that's not scary enough, a financial regulatory group has just issued a report that warns seniors not use these expensive loans as a way to finance their retirement, because they have high fees (typically 7% of the home's value) and can make it difficult for homeowners to leave their property to their heirs. For helpful consumer information on what to look for and what to avoid when shopping for a reverse mortgage, check out the Federal Trade Commission's fact sheet and the AARP's Reverse Mortgage section.

To learn more about reverse mortgages, and whether you are a good candidate for one, see Nolo's article Should You Consider a Reverse Mortgage?.