McKinleyville’s housing stock ranges from settlement era farmhouses to new construction and all the stages in between. For most families, the home is the largest financial asset. A majority of older Americans say they want to continue to live in their homes as long a possible, hopefully until death.
Those facts combine to create an atmosphere ripe for exploitation by loan companies that offer reverse mortgages. When a friend and reader looked into the matter, she found the facts don’t support the advertised claims, and she suggested I write about it. I found that there are several major areas of concern.
A reverse mortgage is often promoted as a way to “unlock the value” of home equity. Instead of selling the house and using the proceeds to buy a smaller one or rent an apartment, the homeowner stays in place and collects payments from the loan company. The money is generally tax free and can be used for any purpose.
That can be a problem. Some people have a low threshold for temptation, and may use the money they borrowed with good intentions on nonessentials. In the current economic climate, stashing it in a savings account or even a CD won’t earn much, and liquid cash on hand is vulnerable to any number of scams.
The ads claim the borrower can remain in the house until death, but that’s not entirely true. The loan can also become due if the last owner has to leave the house for a year, perhaps to be in a nursing home. But a clause buried in the small print can snag the unwary; if the home is not properly maintained, or the taxes, insurance premiums or homeowners’ association dues lapse, the reverse mortgage ends.
Conventional loans nearly always include an escrow account to pay taxes and insurance premiums, but reverse mortgages don’t. When the loan comes due, the house is sold and any left over equity is paid to the borrowers or heirs. The best part about a reverse mortgage is that even if the sale price of the house doesn’t cover the loan, the loan company takes the loss.
That doesn’t happen very often. One reason is that the upfront costs of reverse mortgages are very high, often in the range of $8000 to $10,000. That cost is usually paid out of the proceeds of the loan, which means the borrowers don’t have to come up with the cash, but interest begins accumulating immediately, even if they choose a line of credit or deferred payment.
With a conventional loan, interest drops over time, as the loan is paid off, but with a reverse mortgage, it compounds. With monthly and yearly fees, extra insurance premiums and other charges, the borrowers might easily deplete $15,000 of their equity without getting a dollar to spend.
If the biggest avoidable danger of a reverse mortgage is not fully understanding the costs, the biggest unavoidable danger is not knowing how long you will live. A seemly healthy person can be hit by a truck or die instantly of undetected heart disease. Another person with a laundry list of chronic conditions may have decades to live.
A reverse mortgage should only be considered in the context of an overall financial plan. I recently read that many homes can be made handier and safer for older people with medical issues for less than $5,000. If the owners’ heirs are emotionally attached to the house, maybe they could help with maintenance issues.
What was once a delight can become a burden. Only an honest assessment of all the possibilities can produce the best answer. A roommate to help with the chores might be a better option than mortgaging a paid-off house.
Sound financial and legal advice are essential before entering into such an important contract. The Area 1 Agency on Aging in Eureka just got a grant which will fund an attorney position to work on “foreclosure prevention and eviction defense,” a need which emphasizes how many seniors have fallen into financial problems related to their housing. The poor economy drove a lot of people to enter risky arrangements which didn’t turn out the way they hoped.
A reverse mortgage can be an effective method for seniors to supplement their income, but everything has to line up just right for that to happen, so anyone thinking about the move should explore all options. A conventional equity loan, or a sale-lease back deal with an heir might be better. If the home presents major physical issues, an evaluation for affordable modifications to make it more livable might be in order.
Above all, it’s important not to make any decision in a hurry. As the end of life grows inevitably closer, some people feel pressured to get their affairs in order, but rushing can lead to choosing a bad option. It can also be a mistake to refuse to even consider the future, as some do.
Advances in medical treatment make it possible for people to live longer, but lax oversight and governmental disinterest make it harder to afford. If you are 60 years of age or older, a thorough review of your financial situation every five years could help keep you solvent as long as you live, however many years that is. That’s something every McKinleyville resident would like to count on.
(Elizabeth Alves thanks her readers for suggesting topics which may interest her audience. Comments and suggestions are welcome care of the Press or to