Dear Savvy Senior,

Can you tell me about reverse mortgages? My wife and I are both in our 70’s and are interested in learning more about this option.

Homebody Bob

Dear Bob,
Over the years reverse mortgages have been considered loans of last resorts, only for financially desperate seniors. Not anymore! The reverse mortgage industry is booming helping retirees from all walks of life use their homes to help fund their retirement.

The Basics

A reverse mortgage is a unique loan that lets older homeowners convert part of the equity in their home into tax-free income that doesn’t have to be paid back as long as they live there. But who’s eligible? How much can be borrowed? What does it cost? And is this right for you? Here are the key points on how a reverse mortgage works and where you can find help:

• Eligibility: To be eligible you must be at least 62 years old, own your own home and currently be living there. There is no income qualification. Even if you have an existing mortgage, you’re still eligible, but you must be able to get enough from the reverse mortgage to pay it off.

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As Falling Home Values Erase Some Long-Held Reverse Mortgage Rules of Thumb, Customers Continue to Subscribe to Both New and Existing Reverse Mortgage Myths

As reverse mortgages continue to grow in popularity so have the various myths and misconceptions surrounding them, making it more important than ever for borrowers to obtain clear and unbiased information about reverse mortgages. To help dispel some of these reserve mortgage misconceptions, Golden Gateway Financial, the Web’s most comprehensive financial resource for seniors and retirees, today shared the truth behind ten of the most common reverse mortgage myths.

“Getting a reverse mortgage is an important financial decision that involves both the head and the heart,” said Eric Bachman, founder and CEO of Golden Gateway Financial. “It’s important to share the truth behind reverse mortgage myths so that seniors and their families can accurately weigh both factors. We are committed to ensuring that families have the right information so that they can make well-informed decisions about reverse mortgages and retirement.”

Myth: The Bank Owns Your Home in a Reverse Mortgage

Reality: This is the most commonly held reverse mortgage misconception. The bank never owns your home. The reverse mortgage borrower retains title as long as they live in the home, just as they would with a traditional mortgage.

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A new state law designed to protect consumers from the risks of “reverse mortgages” mandates greater disclosure of fees charged by lenders but still permits them to penalize borrowers who pay off their loans early.

The allowance for prepayment penalties was described by supporters of the legislation as a compromise measure crafted in the wake of opposition by a national industry lobby group which a year ago scuttled efforts to approve similar legislation.

“Nobody wanted the prepayment penalties,” the state Department of Business Regulation’s director, A. Michael Marques, said yesterday, “[but] if the bill didn’t pass this year, the only one who benefits are the people who are trying to take advantage of the elderly.”

Reverse mortgages allow cash-strapped homeowners who are 62 or older and have paid off their houses to borrow against the equity. The loans do not come due until the borrower sells the house or dies.

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Every now and again ReverseResource.com receives email and/or comments.  The following comment was left in the contact us section.  My response follows:

I would like to state that we are very unhappy with the reverse mortgage that my parents took out from WSFS Bank in 1990. It is a shared appreciation loan that gets 82% of the value of the home. My mother is about to go into a home and the house value is around 2,000,000. My mother will not have the income from the reverse mortgage and needs the money for the nursing home. Not only is WSFS getting a ridiculous interest rate of 11.75% they are going to walk away with another $300,000 - $700,000. This is criminal and immoral to allow these kinds of contracts. Fannie May no longer honors these clauses in their contracts for that very reason. However, when I spoke with Bob Bell at WSFS about the contract he not only was rude but did not see anything wrong with this and no reason he should renegotiate the contract that my parents signed. My father not only was not in his right mind…he died of a brain tumor! It would appear to me to be predatory lending. What does your organization do to protect seniors against lenders with only their profits and self interest at heart and why do you support banks that rip off consumers equity in addition to the huge interest rates they charge? Do you have any recommendations for recourse? Thank you for your response.

Christine Carlton

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Australia’s reverse mortgage sector has experienced a boom, promoting a call for retirees to seek professional advice.

As Australia’s reverse mortgage market skyrockets, retirees are urged to seek informed advice before making decisions over their options, according to Sydney Wide Investments Mortgage Manager (SWIMM) managing director Tim Stoyles.

“At the moment, the reverse mortgage market is around $1 billion-$1.5 billion, but more growth is expected, with projections of up to $15 billion in the next five years,” Stoyles said.

“The figures we’ve seen show it is growing at 50 per cent per annum compared with previous years.”

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Social Development Minister Ruth Dyson today said the Government was looking at a mandatory code of practice, to protect the elderly, for those offering reverse mortgages.

Ms Dyson told Parliament’s social services select committee that home equity releases, also known as reverse mortgages, were a good way for elderly people to get money.

Reverse mortgages are mostly taken up by pensioners who give title to all, or part, of their home in exchange for instalment payments of cash. The money is recovered from the pensioner’s estate when they die.

“I am not implying any of the home equity schemes are anything but reputable but I do believe we have an area of vulnerability, so we may well have some shonky behaviour in the future,” Ms Dyson said.

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Well-intentioned consumer groups have done an admirable job of curbing the abuses of mortgage lenders, but recent legislation passed in Washington state will inadvertently curtail the number of lenders able to offer reverse mortgages.

In a nutshell, Washington state consumers pushed their representatives to increase lender licensing requirements and scrutinize all negative amortization loans. Negative amortization occurs when the monthly loan payment is less than the principal and interest needed to pay off the loan in a specific period of time. The difference is added to the loan amount, so that the borrower owes more than the amount initially borrowed.

Since negative amortization is a key component of all reverse mortgages currently in the marketplace, the number of lenders offering reverse mortgages will be reduced.

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The distinguished voice on the radio advertisement pitching reverse mortgages has a familiar ring: Yes, that’s James Garner, the venerable television and film actor.

Garner, in ads for a lender, touts reverse mortgages as an option for homeowners age 62 or older who are seeking an influx of cash to better manage their ever-mounting expenses - or just live a bit better in retirement.

But the increasing popularity of reverse mortgages has revealed some pitfalls that can be avoided by doing what thousands of U.S. foreclosure victims who entered into bad adjustable rate loans should have done three and four years ago: Ask questions, do the proper homework, and don’t get swayed by smooth-talking salesmen.

The basics of the reverse mortgage are simple enough to grasp (though the name itself sounds like some kind of wrestling move). It allows an eligible homeowner to borrow from the home’s equity in a lump sum, line of credit or regular payments, while not having to pay a monthly mortgage. The homeowner retains title and must pay insurance and property taxes while living there.

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BRISTOL, Tenn. - Marketed through television advertisements featuring senior celebrities like Pat Boone, Robert Wagner and James Garner, reverse mortgages are becoming more and more popular across the nation.

But it is difficult to find local people who have chosen a reverse mortgage as an answer to their financial needs because their sense of pride keeps them from speaking publicly about it.

“They’re still very private,” said Joan Dawson, a reverse mortgage specialist with Wells Fargo’s Johnson City, Tenn., branch. “They feel they weren’t able to make ends meet with the funds they had.”

Such mortgages are looked down upon by people like retired Bristol Tennessee resident Robert Latham, who doesn’t think the financial arrangement is all it claims to be.

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It’s a tempting proposition: after years of writing cheques to the bank to pay off your mortgage, the bank will write a nice big cheque for you.

That’s the allure of reverse mortgages, which allow anybody 60 or older to borrow money against the value already built up in their home. With the number of 60-year-olds in Canada expected to double in the next 25 years, demand for the product is expected to grow.

Seeing that as an opportunity, a new provider of reverse mortgages has arrived in Canada, providing some competition to the Vancouver-based Canadian Home Income Plan, which has become almost synonymous with the product over the past 20 years.

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