Reverse Mortgages: Good For Seniors?
Bank of America recently announced it would stop offering reverse mortgages to customers. Reverse mortgages have been marketed toward elderly homeowners, as a way to use equity of the property for extra cash. But how exactly does it work and is it a good idea? In Tell Me More's regular "Money Coach" segment, personal finance contributor Alvin Hall explains reverse mortgages to host Michel Martin, and lays out the pros and cons.
MICHEL MARTIN, Host:
And now we turn to matters of personal finance. And if you've surfed TV stations recently, you might've come across a commercial like this one.
(SOUNDBITE OF TV AD)
MARTIN: Hi, I'm Fred Thompson. And, you know, if you're like a lot of folks out there lately, then finances might be a little tight. Well, maybe it doesn't have to be that way. 'Cause if you're 62 years or older and own your own home, then join hundreds of thousands of other Americans who have used a reverse mortgage as a safe, effective financial tool.
MARTIN: Now, this advertisement is from the American Advisers Group and it's just one of the dozens out there promoting so-called reverse mortgages. Now, recently, Bank of America announced it would stop offering this type of mortgage that it could, quote, concentrate on traditional mortgages, like, other nontraditional mortgage products like home equity loans.
The learning curve might be steep for the average consumer, so, we've called upon our money coach Alvin Hall to tell us more about what these are and whether you might want one or not. Alvin, welcome back.
ALVIN HALL: Glad to be here.
MARTIN: So, what exactly is a reverse mortgage?
HALL: A reverse mortgage is a loan made against a equity in your house. If you're 62 years or older and you really need some money, you can go and apply for this and they will give you an amount of money based on the equity in your house. It allows you to tap into it.
And there's some good things about this and some bad things. The bad things are that usually these types of reverse mortgages come with huge upfront fees. Organizations that hit you hard for the fees, so it ends up being a huge percentage of the equity that you have in the house. But for somebody's who's exhausted all options, this is sometimes a way for them to stay in their home.
MARTIN: Now, why would Bank of America get out of this area? It seems that there's this conflicting news on this point. On the one hand, last October, the FHA, the Federal Housing Administration announced that it would offer something called a home equity conversion mortgage, which is a type of reverse mortgage, but now Bank of America says it's getting out.
HALL: Probably because of the fees. In the new mortgage structure, which is called the home mortgage conversion, the home equity conversion mortgage, the upfront fees have been reduced to .01 percent and that's pretty low. In the past they've been much, much higher. And I think it's just not as profitable for Bank of America. They're going to spin it a different way, of course. They're going to say, you know, we're going to concentrate on our core business. But in reality, they're just not as attractive.
MARTIN: Now, why would these - I understand what you're saying is why this would be attractive to somebody for whom - who needs an additional source, you know, of cash. But a lot of people's home values have been shrinking over the last two years in the wake of the recession. So, if you are in that situation, is this attractive?
HALL: It's going to be real tough, because the fee structure will eat you up. Not only do you have to pay insurance on this, there's an additional 1.25 percent ongoing fee to cover any default on the mortgage or in case you sell the property and the property is less than the reverse mortgage. You have to pay that ongoing fee and interest builds up year after year after year. So people need to look at these as one option, but maybe not the best option. Maybe the thing you want to do is to sell that property and move to something that's going to cost you less.
MARTIN: Now, what about people who want to will a house to a child or to a spouse? Or let's say there's the sad situation where one spouse predeceases the other - what happens?
HALL: That's an interesting set of questions you ask. For one thing, let's look at the situation when one spouse predeceases the other. They need to make sure that both of their names are on that title insurance. Because if only one name is on that mortgage, then what's going to happen, that person will have to move when the person who actually holds the mortgage dies. So, both names need to be on the mortgage.
And the question about inheriting property, that's interesting because this has happened to a friend of mine. She took out a reverse mortgage and she wanted to make sure that she could have some money to live in case of emergencies. But now she is more concerned about what would happen when she dies. When someone dies, let's say they have a reverse mortgage of $50,000. And the house is worth, let's say, 200,000. Then, when they sell the property at the market value, they will get the difference between the $200,000 value when they repay the loan. So they'll net $150,000. You won't inherit the property.
MARTIN: You won't inherit the property. Or, rather, what is left is reduced by the amount of the so-called...
HALL: Exactly.
MARTIN: And, finally, I think this is a question we sort of asked at the beginning, so I apologize for that. A reverse mortgage is only available if you've already paid off your home.
HALL: You need to be - yeah, exactly. You need to be 62 or the money that you're getting from the reverse mortgage can pay off the remaining outstanding loan on your home.
MARTIN: So how do you get money out?
HALL: When you apply, you can get money out. It's either a lump sum. You can get what they call 10-year advances, which means they'll pay you against the reverse mortgage for the rest of your life; or you can get a fixed term advance, which means they'll pay you for a number of years. Also, you can combine those in different ways. So it depends upon on what you need. But people need to watch this, because sometimes those monthly payments can affect other government services, particularly Medicaid.
MARTIN: So you really need to pay attention to what the terms are, what you need the money for and really pay attention to the fine print and do your math.
HALL: Yes. And I think for most people, this should be a last resort, not the first resort.
MARTIN: Alvin Hall is TELL ME MORE's regular contributor on matters of personal finance and the economy. He was with us from our studios in New York where we'll be tomorrow. Alvin, thanks so much for joining us.
HALL: See you in New York tomorrow.
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