On December 19, 2010, The New York Times published one of its signature, magisterial editorials under the somewhat lurid headline, "Borrowers as Prey, Again". It criticized Federal Reserve proposals to lighten regulation of the reverse mortgage market, which, it said, had grown from 8,000 mortgages in 2001 to 118,000 in 2009.
Earlier that month, the Consumers Union issued a press release. It was headed, "Reverse Mortgages Can Come with Big Risks and High Costs for Seniors", and included a quote from Norma Garcia, who is a senior staff attorney with the organization. She said:
Reverse mortgages are a very risky deal for borrowers who don't understand the complicated terms of the loan and how quickly fees and interest charges can add up. Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income.
Reverse mortgages--the reality
There's nothing in these examples--or most other coverage--that is actually incorrect:
- It's true that reverse mortgages are complicated financial instruments that require tight regulation
- They can--just like all mortgages and other forms of credit--be risky for those who don't understand what they're signing up for
- They usually shouldn't be used by those who have cheaper alternative sources of credit, such as a home equity line of credit
No, it's not the factual content, but the tone of the reporting that could be seen as misleading. Much of the coverage surrounding this form of mortgage loan seems designed to scare people off. Yet even that Times editorial contained a slightly buried acknowledgement that "Reverse mortgages can be a helpful way to make ends meet…"
Five questions to ask
The American Association of Retired Persons (AARP) publishes a list of five questions that it urges those considering a reverse mortgage to ask themselves before they sign anything:
- Do you need a reverse mortgage? It's generally a mistake to use one to pay for expensive treats, or other unnecessary expenditures, or in order to raise money for investments
- Can you afford one? Potentially high fees and interest rates don't matter as much (except, perhaps, to your heirs) if you stay in your existing property until you die. However, these could quickly eat into the equity in your home, and that might be a problem if you need to sell up and move at some point in the future
- Is now the right time? You can only use the equity in your home once. If you do so now, and later need more money for, say, emergency medical expenses, you could find yourself in trouble
- Do you fully understand the deal? Reverse mortgages are complicated and varied, and you don't want any nasty surprises further down the line. The Wall Street Journal recently suggested that older people generally might be wise to involve younger friends or relations when making important financial decisions
- Do you still have access to alternative credit? Reverse mortgages are often a relatively expensive form of borrowing, and you should explore alternatives, such as a home equity line of credit
Home equity line of credit better for some?
A home equity line of credit is typically likely to be significantly cheaper than a reverse mortgage, and may prove more flexible if your circumstances change. However, the latter brings its own advantages, not least in that it may be easier to get approved for one, especially if your existing income or credit history would disqualify you from the former.
And that, really, is the point. Reverse mortgages are a poor choice for some, and an excellent one for others. Your task is to work out in which group you belong. And you can often only do that if you take--and take the trouble to understand--professional advice from a seriously credible, independent source.
Don't be put off by negative media coverage, but do recognize the enormity of the decision you're planning to make. The chances are you won't be able to correct a poor choice now without suffering substantial loss later.
Of course, there's no reason not to begin to educate yourself by obtaining a reverse mortgage quote now.