The ads make them look so great. Vacations, living a great lifestyle, happy couples, smiling at their good fortune. Rewards are repeated again and again. Sincere movie stars of a certain age make the commercials believable. You can get cash now. It’s so easy. Just get your reverse mortgage and your problems will be solved. Pay off debt. Have fun. Do all the things you’ve always wanted to but couldn’t afford.
So, what’s wrong with this picture? A reverse mortgage is more debt and one of the most expensive forms of credit you can get. At the San Francisco 7th Annual Conference on Elder Abuse, a panel spoke on this subject, drawing back the curtain that cloaks the truth: reverse mortgages are not for just anyone and they can create some new problems the broker isn’t telling you about. My husband Mikol and I attended the conference and we learned about some serious problems.
The panelists discussed the risks and dangers of reverse mortgages:
The Senior Might Need to Move in the Future
If you incur the debt of a reverse mortgage, or your aging parents do, it’s ok as long as they can live in that home. What happens when they have to move out and into assisted living or a nursing home? The mortgage becomes due. Now, there is the expense of paying it off, besides the high cost of the assisted living or nursing home care. It can leave an elder homeless.
It Can Affect Any Dependent in the Home
If the elder who needs care in a facility has non-borrowing family members in that home, the loan is still due. Anyone left in the home must move out, go to a care facility or be taken in by someone else. Those displaced if a borrowing elder has to go to a care facility can include a non-borrowing spouse, child or grandchild. They are “tenants” according the the rules of reverse mortgages and they have to leave when the elder does.
It Can Go Into Default
If an elder with a reverse mortgage fails to pay property taxes, to keep up insurance on the home, or fails to maintain the home, he is in default. The lender can then foreclose. Lenders are in a good position to purchase such properties cheaply and then flip them for a good profit. Elders who are low on cash may fail to pay home insurance premiums or property taxes. If they are getting forgetful, they might not maintain their properties.
When the Elder Dies, the Heirs Must Pay Off the Loan
The entire principal, plus accrued interest and service fees must be paid in full to the lender before the heirs can rightfully take possession of the home. This debt may exceed the actual market value of the home. If they can’t pay the debt, the lender has the right to foreclose and sell the property. Low wealth heirs are not likely to be able to pay the debt and those homes fall into foreclosure. Goodbye inheritance.
The Amount the Lender Will Loan is Limited
There are seemingly irrational formulas used to calculate how much a borrower can get on a reverse mortgage. If an elder lives into one’s 90′s, becoming more common these days, there is a risk that the amount loaned will not be enough to sustain the elder who needs long term care at home. The elder can run out of money to make the loan payments, go into default and end up homeless and impoverished. This is a real risk, particularly for anyone who thinks it’s a dandy idea to take out a reverse mortgage to pay for home care providers. If the elder borrows, say, $200,000, and ends up needing care 24/7, that reverse mortgage cash she got will be exhausted in about two years or less. Then what? Default, foreclosure and Medicaid paid nursing home.
According to Norma Paz Garcia, Senior Attorney for Consumer’s Union of the United States, there is no suitability standard for reverse mortgages for seniors. We need standards. She warns that all seniors need truthful counseling to warn of the negative consequences and potential harm of reverse mortgage products. She urges borrowers to consider any other possible alternatives to raising cash such as a forward mortgage equity lines, inter-family loans, local government loans or public benefits.
So what’s the bottom line? Consider a reverse mortgage an option of last resort. If you or your aging parent gets charmed by the TV ads, get advice from a competent financial planner and elder law attorney before doing anything. Recognize that your aging loved one might not be in perfect health to the end of her days and that care at home might cost more than a reverse mortgage could cover, especially over a period of years. There just might be less costly, smarter ways to deal with the need for money when funds run low.
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