Plan may be solution for older borrowers whose assets are dwindling, but experts say beware
Jane DelSordo has been so happy with her reverse mortgage from WSFS Bank that she agreed to appear in the bank’s newspaper ads.
The 73-year-old, who paid cash for her Chadds Ford, Pa., town home in 1987 after selling property from a divorce, said she did her homework before signing the papers about a year ago.
The loan would eliminate her payments of about $1,000 a month on outstanding debts, and still give her enough to renovate the entire house — including new windows, a new heater, and a hot tub downstairs.
“Basically, I’m spending my house, instead of spending my savings — which are limited,” DelSordo says. She still has more than $100,000 in home equity to tap as long as she lives in her home, she says. And the balance she owes will never grow beyond the value of her house.
“This is like a lottery ticket,” she told the bank. “I win or you win. If I die, you win. But if I live … I can be living here for nothing.”
DelSordo is one of more than 393,500 homeowners who have taken out a reverse mortgage since the product came out nearly two decades ago.
A reverse mortgage is essentially a home equity loan for older borrowers. The most common type of reverse mortgage, which also has the most consumer protections, is the Home Equity Conversion Mortgage (or HECM), insured by the Federal Housing Administration.
Offered to homeowners 62 or older, the loans allow seniors to convert part of their home equity into tax-free income without selling their home or giving up the title.
The amount a borrower receives depends on the homeowner’s age, the amount of equity in the home and the interest rate. Homeowners can take the money in a lump-sum payment, an income stream, a line of credit, or a combination of the three. More than 60 percent of borrowers choose the line of credit, according to the National Reverse Mortgage Lenders Association.
For those who do their research and understand the product, a reverse mortgage can help make ends meet when cash has run dry. After attending two free Money School classes about reverse mortgages this month, Virginia B. Coleman says she’s still considering whether one will work for her.
Coleman, who will turn 80 in September, moved to Claymont from Baltimore a few years ago to be closer to her only daughter, and has drained much of her resources. She is considering a reverse mortgage to help her buy a car and fix up the house.
“And I won’t have the $1,300 mortgage payment,” she says.
Yet despite close to 20 years of history, reverse mortgages are relatively new and still widely misunderstood.
“We get calls from people asking us to explain it,” says Trish Kauker, vice president for Reverse Mortgages at WSFS Bank. “And when we try to set an appointment, they say, ‘We don’t want to waste your time. We already have one. We just don’t understand it.’ ”
Only about 1 percent of households nationwide have ever taken out a reverse mortgage, according to Don Redfoot, strategic policy adviser in AARP’s policy institute. And while reverse mortgages can provide a steady income stream or much-needed cash to elderly homeowners who are “house rich but cash poor,” the loans are not a panacea.
Homeowners are still responsible for paying property taxes and homeowner insurance. And with a reverse mortgage, a homeowner’s debt will increase while home equity will decrease.
“It’s surprising how many people don’t understand that these are loans,” says Redfoot. “And these are high-cost loans.”
Fees, which are usually wrapped into the loan balance rather than being paid upfront, include an origination fee and a mortgage insurance premium — both of which cost up to 2 percent of the home’s value — a servicing fee, closing costs and interest.
A homeowner who plans to move in a few years or needs a few extra dollars for a new roof or heater might be better served by a home equity loan than a reverse mortgage, says Kauker.
Some fear that the reverse mortgages industry could be vulnerable to the predatory lending practices — such as aggressive marketing and excessive fees — that befell the subprime mortgage market.
FBI director Robert Mueller told Congress on Wednesday that the agency is seeing an uptick in fraud surrounding the reverse mortgage industry.
“Consumers should be wary of anyone who is trying to sell them anything and using a reverse mortgage to pay for it,” Redfoot says.
DelSordo is familiar with the wary attitudes toward reverse mortgages. Many of her friends tell her they’d love to get rid of their monthly mortgage payments, but are afraid to take the leap.
“They want to do it and they’ll say, ‘I’m not quite ready for that yet,’ ” she says. “They’re afraid they’re giving their house away.”
Although DelSordo knows better, she respects that caution. Anybody who is looking into a reverse mortgage should think carefully and do a lot of research to make sure a reverse mortgage works for them, she says.
“You evolve into things like this. Nobody should get a reverse mortgage on a dime,” she says. “You know the bank is making money — but is it good for ME?”
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